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^ n5 v
No. 11971
United ^tatea
Oltrmtt Ol0«rt of A|i|ii?ala
for tif^ ■Ntntlj Olirttitt
CECIL E. HUMPHRIES,
Appellant,
vs.
ROBERT A. HEINZE, Warden, etc..
Appellee.
©ranamiJt of l^rorh
Upon Appeal from the District Court of the United States
for the Northern District of California,
Northern Division
Typo Press, 398 Pacific, San Francisco
AUG 3- 1948
PAUL F^ CBRIBN.^
No. 11971
dtrrittt (Honvt of Apjj^alB
far tiff Nintli CHirrtrtt
CECIL E. HUMPHRIES,
Appellant,
vs.
ROBERT A. HEINZE, Warden, etc.,
Appellee.
QlrattHrrtpt of ^Sttoth
Upon Appeal from the District Court of the United States
for the Northern District of California,
Northern Division
INDEX
[Clerk's Note: When deemed likely to be of an important nature,
errors or doubtful matters appearing in the original certified record
are printed literally in italic; and, likewise, cancelled matter appear-
ing in the original certified record is printed and cancelled herein
accordingly. When possible, an omission from the text is indicated by
printing in italic the two words between which the omission seems
to occur.]
PAGE
Certificate of Clerk to Transcript of Record on
Appeal 13
Letter addressed to Paul P. O'Brien, Clerk, U. S.
Circuit Court of Appeals, in Support of Peti-
tion for Writ of Habeas Corpus, signed Cecil E.
Humphries 14
Minute Order — April 21, 1948 — Denying Petition
for Writ of Habeas Corpus 12
Names and Addresses of Attorneys 1
Notice of Appeal 12
Petition for Writ of Habeas Corpus 2
NAMES AND ADDRESSES OF ATTORNEYS
For Appellant:
CECIL E. HUMPHRIES,
Box No. A-6859,
Represa, Calif.
Attorney for Appellee:
THE ATTORNEY GENERAL,
State of California,
Sacramento, Calif.
2 Cecil E. Humphries vs.
In the United States District Court for the
Northern District of California, Sacramento,
California
No. 5981
In the Matter of Aj^plication of
CECIL E. HUMPHRIES,
for a Writ of Habeas Corpus.
PETITION FOR WRIT OF HABEAS CORPUS
To the Honorable Dal M. Lemmon, Presiding Judge
of the United States District Court,
Greetings :
The petition of Cecil E. Humphries, for a writ
of Habeas Corpus, resj^ectfully represents and
shows to this Hon. Court:
I.
That your petitioner, Cecil E. Humphries, a
natural born citizen of the United States, over the
age of twenty-one years, is now illegally and milaw-
fully imprisoned, confined, restrained and deprived
of his lawful right to liberty, by the State of Cali-
fornia, and by Robert A. Heinze, et al., by impris-
onment in the State Prison of the State of Cali-
fornia, contrary to and in violation of the privileges
and immunities, due process of the law, and equal
protection of the laws clauses of Article XIY, Sec-
Robert A. Heinze 3
tion 1, of the Amendment to the Federal Constitu-
tion, for reasons immediately hereinafter made to
appear :
II.
That prior to the date of the filing of this peti-
tion and on July 15, 1947, in Department "B" of
the Superior Court of and for the County of Los
Angeles, State of California in Santa Monica, be-
fore the Hon. Orlando H. Rhodes, judge therein
presiding, upon an information, theretofore filed
in said Court by the district attorney of the County
and State aforesaid, charging petit theft with prior
conviction of a felony, being No. 113274.
III.
That the imprisonment of said petitioner, Cecil
E. Humphries, is contrary to and in violation of
the said privileges and immunities due process of
the law, and equal protection of the laws clauses
and provisions of the Fourteenth Amendment to
the Constitution of the United States of America,
and Article 1, Section 13 of the Constitution of the
State of California.
The clause XIV, Amendment to the Constitution
of the United States which forbids a state to "deny
to persons within its jurisdiction the equal pro-
tection of the laws."
IV.
Your petitioner, Cecil E. Humphries, contends
that he has not had the required protection that is
provided for by the Equal protection of the Laws;
that the arrest, confinement, conviction and impris-
onment is illegal, and the proceedings are likewise
4 Cecil E. Humphries vs.
illegal in their entirety; and the trial that was held
before the Hon. Orlando H. Rhodes, was uncon-
stitutional wherein the said jury returned its ver-
dict of not guilty, but, because the foreman of the
said jury failed to sign his name to the verdict,
the Court would not recognize said verdict, and
returned the jury for another.
V.
Further, this same jury, acting on the same evi-
dence and charge, and only one court of theft, re-
turned two other verdicts, which was plainly shown
double jeopardy.
VI.
Let it be said at this time that the jury took the
case for consideration, and at no time was any
defense offered in opposition to the pretended evi-
dence, whereas the defense rested without contest-
ing what was supposed to be a case.
VII.
Your petitioner contends that every right that
was favorable to him, from the time of arrest, was
denied; and an examination of the record in this
case will verify and substantiate aforesaid conten-
tions. Whereas your petitioner has been without
sufficient funds, only part of the transcript could
be obtained, and petitioner, Cecil E. Humphries,
beg this Hon. Court to obtain a complete transcript
of the said trial, and he do contend that said trans-
cript is sufficient to prove double jeopardy and all
other claims which will present a light of truth to
all allegations made by petitioner of said case,
being No. 113274.
Robert A. Heinze 5
VIII.
That in a writ of Error Coram Nobis to this
same judge Orlando H. Rhodes, it was outlined,
that according to the California Penal Code,
S-1097, that when a reasonable doubt as to the
degree, a defendant can be convicted only of the
lowest degree, and included, was a case from Cali-
fornia reports, Tuttle-1874 No. 4,167, this writ of
Coram Nobis was denied; and it is the contention
of petitioner that there is not a grand jury in ex-
istence in the United States that would bring in
an indictment on such evidence as was offered in
the conviction in the instant case. Where the pres-
ent methods are used, as in the present case, your
petitioner contends that judge Orlando H. Rhodes,
in this case, does not recognize either the constitu-
tion of California or the United States, therefore
it is absolutely impossible to get a fair and impar-
tial trial in his Court.
IX.
Therefore, wishing to show the allegations of
the none legallity of the proceedings, petitioner,
has a copy of the proceedings at the preliminary
hearing.
That on May 7, 1947, the proceeding at this said
hearing, plainly show that there was not one bit
of legal evidence sufficient to hold any one for trial ;
as the only thing admitted into the record as evi-
dence, with any semblance of truth, was the de-
fendant's prison record, which the government
keeps on record for the purpose of identification.
6 Cecil E. Humphries vs.
not for the states to use as evidence and exhibits
in a Court of law.
However, your petitioner will not make this copy
and contents of the preliminary hearing a part of
this writ, but will have it in Court w^hen the writ
is heard, to bolster all claims made in reference to
it and the evidence used at the trial.
Further, your petitioner will include a certified
copy of the additional instructions, that shows a
"not guilty" verdict, and two other verdicts
brought in by the jury at the said trial, all of
which the judge refused to accept, therein sending
the jury out to deliberate again without giving
them a possibility of bringing back a not guilty
verdict.
X.
The following is a certified copy of the "Addi-
tional Instructions" given to the jury in the case
of the People vs. Cecil E, Humphries, being No.
113274, which is attached hereto and hereby made
a part hereof for all jDurposes with the same force
and effect as though herein set forth at length.
Filed Santa Monica, July 1, 1947. A. F. Moro-
ney. County Clerk.
ADDITIONAL JURY INSTRUCTION
Additional Instructions Given in the Case of The
People vs. Cecil E. Humphries, No. 113274.
The Court: The record will show that the de-
fendant and jury are present and that the Deputy
Robert A. Heinze 7
District Attorney has been excused from appear-
ing. Ladies and gentlemen, have you arrived at a
verdict '?
The Foreman: We have.
The Court: Will you hand the verdict to the
bailiff, please? Mr. Pfeiffer, you have signed two
forms ?
The Foreman: I got the wrong impression. I
thought after deciding on the case that we were
on, that the other one automatically applied.
The Court: No, that does not necessarily follow.
Let the record show that the jury has handed the
court three verdict forms, one, not guilty, unsigned,
one, guilty of petty theft, a misdemeanor signed by
the Foreman, and one a verdict of guilty as charged
in the Complaint, and also true, the charge of a
prior conviction and service in a penal institution,
therefor.
Are the instructions in the list — do you now see
what the situation is, Mr. Pfeiffer?
The Foreman: Yes, I believe so.
The Court: Petty theft is an included offense
of this charge. The charge is petty theft with a
prior conviction of a felony.
The Foreman: Yes, Sir.
The Court: If you find that there was no prior
conviction of a felony but that the defendant com-
mitted the crime of theft, as otherwise defined in
my instructions, then, and in that event only should
you bring in a verdect of guilty of petty theft a
misdemeanor.
8 Cecil E. Humphries vs.
The Foreman: That was our intention.
A Juror: No, it was not.
The Court: Is it your intention to bring in a
verdict of petty theft, a misdemeanor, or did you
intend to find the defendant guilty as charged in
the information?
The Foreman: That is right.
The Court: In order to do that you should take
another vote and receive authorization by a unani-
mous jury, and to return a verdict of guilty of
petty theft, a misdemeanor, which is a lesser and
included offense, you must find that is the only
offense of which the defendant is guilty, if you
find he committed the crime of petty theft, and
that the prior conviction is not true. Do you fol-
low me?
A Juror: I do not.
The Court: If, however, you believe that you
have found that the defendant committed the crime
of petty theft and it is true that he was convicted
of the felony of burglary in the State of Utah and
served a term in the Utah penal institution, then
your verdict would be the finding of guilty as
charged in the information, and further find the
charge of the second conviction and service in a
penal institution, therefor, is true. Do you all
understand now?
The Foreman: That is what w^e thought we were
doing.
The Court: It is not entirely proper to state
what you had intended to arrive at, at this time.
Do you now understand what you want to do, in
Robert A. Heinze 9
view of these instructions, when you return to the
jury room? Are there any questions of any of
you? Shall I go over it again? The defendant is
charged with the crime of petty theft and a prior
conviction of a felony. If you find him guilty of
petty theft and that there was a prior conviction of
a felony, and that he served a term in a penal in-
stitution, then return a verdict of guilty as charged.
If on the other hand, you find him guilty of petty
theft as defined in my instructions previously given,
but that was not a good prior conviction — that he
did not serve a term in a penal institution — then
return a verdict of guilty of petty theft. Now
what I have said is in no way to detract from the
heretofore read instructions. You are not to dis-
regard them in any respect. You are to consider
all of them along with these additional instruc-
tions which I have now given you, which shall
become, and are ordered to become a part of the
record in the case. Any other questions now?
Reconduct the jury to the jury room, and if and
when you have arrived at a verdict announce the
same to the bailiff, please, Mr. Pfeiffer.
XII.
(10:00 Oclock p.m.)
The following is office of jury; ruled on by the
California Supreme Court, showing that the jury
has nothing to do with legal affects, as this case
had no facts for the judge to instruct the jury on;
as will be seen in the following.
California reports, Tuttle— 1874 (No. 4,167).
Office of trial jury. It is the office of a trial jury
to Cecil E. Humphries vs.
by their verdict, to find the facts in issue, whether
general or special, and with the legal effect of those
facts they have no concern.
XIII.
Dissent of Jury, — Although a jur^or may, at the
last moment, dissent from a verdict rendered, yet
that dissent must be founded on the question of
the fact presented by the verdict, and not upon the
information received from the verdict of Jury —
If jury has special issues submitted to them, and
find on these issues, and also find a general verdict
for the plaintiff and when the verdict is read, the
Court declares that on the findings the defendant
must have judgment, and some of the jury then
dissent from the special verdict, and the Court
sends them out for further deliberation, and they
then return with a general verdict, but are unable
to agree on the special verdict, the Court should
not accept the general verdict.
XIV.
And whereas, pursuant to said judgment and
commitment the petitioner's imprisonment has been
changed to the Folsom State Prison, in Sacramento
Coimty, State of California.
XV.
Wherefore, the said Cecil E. Humphries prays
that a writ of Habeas Corpus issue, directed to the
said Robert A. Heinze, as Warden of the Califor-
nia State Prison in the United States of America,
commanding him the said Robert A. Heinse, as
Warden, supra, to have and to bring the body of
the said Cecil E. Humphries, before and into the
Rohe^'t A. Heinze IX
United States District Court, Northern District of
California, Sacramento, California, and that the
said United States District Court of Northern Cali-
fornia, and Hon. Judge Dal M. Lemmon thereof dis-
charge the said Cecil E. Humphries, and order and
Secure his Release from such Restraint, and the said
Robert A. Heinze, as Warden, do and abide by the
Order of the said Court.
Respectfully submitted,
CECIL E. HUMPHRIES,
In pro. per.
State of California,
County of Sacramento — ss.
Cecil E. Humphries, first being duly subscribed
and sworn to says and deposes that he is the peti-
tioner for writ of Habeas Corpus, and that he has
read the contents of the foregoing petition and
knows the contents therein to be true to the best of
his knowledge; and, also as to those matters related
on information and allegations, he believes them
to be true.
CECIL E. HUMPHRIES,
In pro. per.
Subscribed and sworn to before me this 14th day
of April, 1948.
(Seal) PETER J. MURRY,
Notary Public in and for the County of Sacra-
mento, State of California.
Notation that filing fee is being paid in full at
the same time that the writ is notarized.
[Endorsed): Filed Apr. 21, 1948. C. W. Cal-
breath. Clerk.
12 Cecil E. Humphries vs.
At a stated term of the Northern Division of
the United States District Court for the Northern
District of California, held at the Court Room
thereof, in the City of Sacramento, on Wednesday,
the 21st day of April, in the year of our Lord one
thousand nine hundred and 48.
Present: The Honorable Dal M. Lemmon, Dis-
trict Judge.
[Title of Cause.]
Due consideration having been had on the appli-
cation for writ of Habeas Corpus, it is Ordered
that the petition for writ of habeas corpus be and
the same is hereby denied.
District Court of the United States, Northern
District of California, Northern Division
Notice of Appeal is hereby given that Cecil E.
Humphries (being No. 5981) do appeal said action
from the above entitled Court within said action
was denied on April 21, 1948, to the U. S. Circuit
Court of Appeals, whereas, you and each of you
are notified here and now to show cause, if you
have, why said Appeal should not be granted.
CECIL E. HUMPHRIES.
Sworn to and subscribed before me this 12th day
of May, A. D. 1948.
(Seal) PETER J. MURRY,
Notary Public in and for the County of Sacra-
mento, State of California.
My Commission expires on Sept. 2nd, 1951.
[Endorsed] : Filed May 28, 1948.
Bohert A. Heinze 13
CERTIFICATE OF CLERK, U. S. DISTRICT
COURT, TO RECORD ON APPEAL
I, C. W. Calbreath, Clerk of the United States
District Court for the Northern District of Cali-
fornia, do hereby certify that the foregoing 11
pages, numbered 1 to 11, inclusive, contain a full,
true and correct transcript of certain records, and
proceedings in the case of Cecil E. Humphries vs.
Robert A. Heinze, No. 5981, as the same now re-
main on file and of record in this office.
I further certify that the cost of preparing and
certifying the foregoing Record on Appeal is the
sum of Four and 40/100 ($4.40), and that the same
has been paid to me by the appellant herein.
In Witness Whereof, I have hereunto set my
hand and the original seal of said District Court,
this 12th day of June, A. D. 1948.
(Seal) C. W. CALBREATH,
Clerk.
/s/ By F. M. Lampert,
Deputy Clerk.
14 Cecil E. Humphries vs.
[Endorsed]: No. 11971. United States Circuit
Court of Appeals for the Ninth Circuit. Cecil E.
Humphries, Appellant, vs. Robert A. Heinze, War-
den, etc., Appellee. Transcript of Record. Upon
Appeal from the District Court of the United
States for the Northern District of California,
Northern Division.
Filed July 13, 1948.
/s/ PAUL P. O'BRIEN,
Clerk of the United States Circuit Court of Appeals
for the Ninth Circuit.
IN SUPPORT OF PETITION
Office of the Clerk,
U. S. Circuit Court of Appeals,
P.O. Box 547,
San Francisco 1, California,
Mr. Paul P. O'Brien,
Dear Sir:
I am in receipt of a copy of subdivision 6 of
Rule 19, which calls for a statement of points on
which appellant intends to rely on appeal; as I
want the record printed in its entirety ; wherein the
only and material points needed is the fact that
since my conviction, I have been denied without
cause of the denial shown, and/or without my ap-
pearance in court which was prayed for in the writ.
The "question" and only "question", is, has a
Robert A. Heinze 15
judge the power to direct a legal jury to disregard
the first "Not Guilty" verdict, and return a second
one of a verdict of "Guilty"?
Petitioner contends that the lower courts did not
give the writ of error coram nobis or habeas corpus
any consideration, which is provided for by the
U. S. Constitution; whereas, on a writ of habeas
corpus, which in plain English, means "have the
body", but petitioner was not present at said court
denial; whereas. Article 1, Section 9 of the U. S.
Constitution reads:
"The privilege of the writ of habeas corpus
shall not be suspended, miless when in cases of
rebellion or invasion the public safety may
require it."
Please attach the foregoing to said petition, and
make it a part thereof, with the same force and
effect as though it was original. Here's thanking
you in advance, as I remain.
Respectfully,
/s/ CECIL E. HUMPHRIES.
Subscribed and sworn to before me this 23rd day
of June, 1948.
(Seal) /s/ LLOYD P. SMITH,
Notary Public in and for the Comity of Sacra-
mento, State of California.
[Endorsed]: Filed July 13, 1948. Paul P.
O'Brien, Clerk.
No. 11972
IN THE
United States Couf t of Appeals
FOR THE NINTH CIRCUIT
CURTIS COURANT,
Appellant,
vs.
INTERNATIONAL PHOTOGRAPHERS OF THE
MOTION PICTURE INDUSTRY LOCAL 659,
etc., et al.,
Appellees.
TRANSCRIPT OF RECORD
Upon Appeal From the District Court of the United States
for the Southern District of California
Central Division
PAUL P, O'BRiEN, v^
Parker & Company, Law Printers, Los Angeles. Phone TR. 5206.
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
CURTIS COURANT,
Appellant,
vs.
INTERNATIONAL PHOTOGRAPHERS OF THE
MOTION PICTURE INDUSTRY LOCAL 659,
etc., et al.,
Appellees.
TRANSCRIPT OF RECORD
Upon Appeal From the District Court of the United States
for the Southern District of California
Central Division
Parker & Company, Law Printers, Los Angeles. Phone TR. 5206.
INDEX
[Clerk's Note : When deemed likely to be of an important nature,
errors or doubtful matters appearing in the original certified record are
printed literally in italics ; and likewise, cancelled matter appearing in the
original certified record is printed and cancelled herein accordingly. When
possible an omission from the texl is indicated by printing in italics the
two words between which the omission seems to occur.]
Page
Appeal :
Notice of 29
Statement of Points on 30
Certificate of Clerk 32
Complaint 2
Complaint, Amendment to 23
Judgment of Dismissal for Lack of Jurisdiction 28
Motion of International Alliance, etc., to Dismiss 20
Motion of International Photographers, etc., to Dis-
miss 17
Names and Addresses of Attorneys 1
Notice of Appeal 29
Notice of Motion of International Alliance, etc., to
Dismiss 22
Notice of Motion of International Photographers, etc.,
to Dismiss 19
Opinion 24
Statement of Points on Appeal 30
NAMES AND ADDRESSES OF ATTORNEYS
For Appellant:
HENRY B. ELY
453 South Spring Street
Los Angeles 13, Calif.
For Appellees :
HENRY G. BODKIN
GEORGE M. BRESLIN
MICHAEL G. LUDDY
BODKIN, BRESLIN & LUDDY
1225 Citizens National Bank Building
Los Angeles 13, Calif. [1*]
*Page number appearing at foot of Certified Transcript.
2 Curtis Courant vs.
In the District Court of the United States for the
Southern District of CaHfornia
Central Division
Civil Action. File No. 8104 O'C
CURTIS COURANT,
Plaintiff,
vs.
INTERNATIONAL PHOTOGRAPHERS OF THE
MOTION PICTURE INDUSTRY LOCAL 659,
an unincorporated Labor Organization, HERBERT
ALLER, individually and as representative of the
members of said Local 659, DOE 1, DOE 2, DOE 3,
DOE 4, DOE 5, DOE 6, DOE 7, DOE 8, DOE 9,
DOE 10, DOE 11, DOE 12, DOE 13, DOE 14,
DOE 15, DOE 16, DOE 17, DOE 18, DOE 19,
DOE 20, DOE 21, DOE 22, DOE 23, DOE 24,
and DOE 25,
Defendants.
COMPLAINT
Amendment to Complaint Amended :
1st date: 5-10-48
I.
Jurisdiction is founded on the existence of a Federal
question and the amount in controversy, and on the
existence of a question arising under the United States
Constitution, Treaty and under particular Federal statutes.
The action arises under the Constitution of the United
States, Article 1, Section 8, Article 6, the Fifth Amend-
ment to the Constitution of the United States, the Four-
teenth Amendment to the Constitution of the United
States; the National Labor Relations Act, 29 U. S. C A.
International Photographers, etc. 3
151-166, enacted July 5, 1935; Labor Management [2]
Relations Act of 1947, 29 U. S. C. A. 141-197, enacted
June 23, 1947; the Treaty between the United States and
Poland of Friendship, Commerce and Consular Rights,
48 Stat. L. 1507; 28 U. S. C. A. 41 (1, 8, 12, 13, 14,
17, 23); 8 U. S. C. A. 41, 43, under color of Sections
921-923 Labor Code, State of California, and the laws
of the State of California, 8 U. S. C. A. 47, 48; 15
U. S. C. A. 15; the matter exceeds, exclusive of interest
and costs, the sum or value of $3,000.00.
XL
The true names or capacities, whether individual, cor-
porate, associate or otherwise, of defendants. Doe 1,
Doe 2, Doe 3, Doe 4, Doe 5, Doe 6, Doe 7, Doe 8, Doe 9,
Doe 10, Doe 11, Doe 12, Doe 13, Doe 14, Doe 15, Doe
16, Doe 17, Doe 18, Doe 19, Doe 20, Doe 21, Doe 22,
Doe 23, Doe 24 and Doe 25, are unknown to plaintiff,
who therefore sues said defendants by such fictitious
names, and will ask leave to amend this complaint to show
their true names and capacities when same have been
ascertained.
III.
The International Alliance of Theatrical Stage Em-
ployees and Motion Picture Machine Operators of the
United States and Canada, hereinafter referred to as
lATSE, is a labor organization having as its purpose
collective bargaining upon the negotiation of wages, hours
and working conditions for its members; officers and
agents of the lATSE are engaged in representing and
acting for employee members within the above entitled
district; lATSE has an office and place of business with-
in said district; the members of the lATSE are members
4 Curtis Courant vs.
in good standing of labor organizations having the same
purposes and known as local unions and to which the
lATSE has issued a charter; there are approximately
1,000 local unions chartered by the lATSE whose mem-
bers are employed by at least 90% of all employers in the
theatrical, television and motion picture industries of the
United States; in connection with the motion picture [3]
industry members of local unions of the lATSE employed
by all employers engaged in the production of motion
pictures within the State of California erect the stages
for the production of motion pictures, do all work in con-
nection with the filming of scenes of motion pictures, in-
cluding all labor incidental thereto, as well as doing all
make-up work for actors and actresses for motion pic-
tures, and prepare, cut and develop the exposed film for
preparation for shipment into intrastate, interstate and
foreign commerce ; such films are shipped to film exchanges
throughout the State of California, the United States
and foreign countries and, within the United States and
Canada, members of local unions chartered by the lATSE
work within said film exchanges; the members of said
local unions chartered by the lATSE project the film
upon screens in local theatres throughout the State of
California, the United States and Canada; all employers
engaged in the production of motion pictures within the
State of California recognize lATSE as the exclusive bar-
gaining agency for employees engaged in the production
of motion pictures as hereinabove defined; the operations
of the employers engaged in the production of motion
pictures and the operations of the employees engaged in
the production of motion pictures, as aforesaid, affect in-
trastate commerce within the State of California, inter-
state commerce with the several states of the United
States, and foreign commerce; a labor dispute between the
International Photographers, etc. 5
lATSE and employers engaged in the production of mo-
tion pictures as aforesaid would completely shut down
the production of motion pictures within the State of
California and within the United States and would bur-
den and obstruct intrastate, interstate and foreign com-
merce and the free flow thereof all employees engaged
in the production of motion pictures as aforesaid, with
the exception of first cameramen (also known as directors
of photography) have designated the lATSE as their
exclusive bargaining agency on wages, hours and work-
ing conditions the lATSE is not and never has [4] been
established, maintained or dominated by any employer
engaged in the production of motion pictures; ever since
January 1, 1943, the lATSE imder and by virtue of the
National Labor Relations Act and under the color of Sec-
tions 921-923 of the Labor Code, State of California, and
the laws thereof, has been a party to contracts with all
employers engaged in the production of motion pictures,
for the benefit of employees engaged in the production of
motion pictures as aforesaid, including first cameramen;
under said contracts employees engaged in the work as
outlined above are required as a condition of employment
to maintain membership in the lATSE and its local unions ;
ever since January 1, 1943, no person employed by any
employer engaged in the production of motion pictures as
aforesaid wherever manual work was involved has been
employed without membership in the lATSE or a work
permit from one of its chartered locals.
IV.
Pursuant to the direction of election of the National
Labor Relations Board made August 28, 1939, and re-
corded in Official Records of the Board, 14 N. L. R. B.
224, the National Labor Relations Board did certify the
6 Curtis Conrant vs.
lATSE and its various local unions composed of mem-
bers engaged in the production of motion pictures as
aforesaid as the exclusive bargaining agency for all of
said employees, with the exception of first cameramen;
that the Official Record of said certification is found in
15 N. L. R. B. 225; said certification is still in force and
effect; the lATSE represents some 10,000 employees en-
gaged in the production of motion pictures within the
State of California, County of Los Angeles.
V.
A first cameraman is a highly skilled person with many
years of experience in all phases of motion picture camera
work who is responsible for the artistic photographic effect
of the action of the camera upon scenes taken for motion
pictures, including the lighting thereof, the camera angles
and the like, and is solely [5] responsible for the photo-
graphic results on the screen.
VI.
The American Society of Cinemaphotographers, here-
inafter referred to as ASC, was from prior to 1941, and
until the end of 1942, a labor organization composed of
first cameramen for the purpose of collective bargaining
on the part of all first cameramen upon wages, hours and
working conditions of first cameramen with employers en-
gaged in the production of motion pictures within the
State of California; during said period the ASC repre-
sented a majority of first cameramen in said State and
there was in force and effect contracts with all employers
within said State requiring that as a condition of em-
ployment first cameramen be members of the ASC; the
ASC was not established, maintained or dominated by
any employer; no person could be employed by any em-
I
International Photographers, etc. 7
ployer engaged in the production of motion pictures with-
in said State unless he were a member of ASC; on or
about December 10, 1942, all members of the ASC desig-
nated the defendant. International Photographers of the
Motion Picture Industry, Local 659, an unincorporated
labor organization, hereinafter referred to as Local 659,
as their collective bargaining agent to represent them on
wages, hours and working conditions.
VII.
Local 659 is a labor organization having as one of its
purposes the collective bargaining with employers upon
negotiation of wages, hours and working conditions for
its members; that officers and agents of Local 659 are
engaged in representing and act for employee members
within the above entitled district, and Local 659 maintains
its principal office therein; on December 10, 1942, and all
times thereafter Local 659 was a chartered local union of
the lATSE; ever since December 10, 1942, Local 659
has been designated by a majority of first cameramen in
said State of California as their exclusive bargaining
agency on [6] wages, hours and working conditions and,
ever since the said date. Local 659 has represented first
cameramen in negotiations with all employers engaged in
the production of motion pictures within said State as
aforesaid; that Local 659 is not established, maintained
or dominated by any employer; ever since December 10,
1942, there has been no controversy between any employer
and Local 659 as to whether or not Local 659 was the
exclusive bargaining agency for first cameramen on wages,
hours and working conditions of first cameramen; at all
times since that date Local 659 has acted as the ex-
clusive bargaining agency on wages, hours and working
conditions of first cameramen; pursuant to, by virtue of
8 Curtis Courant vs.
and under the color of the authority granted to it by the
National Labor Relations Act, Sections 921-923 of the
Labor Code of the State of California, and the law of
the State of California, Local 659, on or about January
1, 1943, entered into contracts with all employers engaged
in the production of motion pictures as aforesaid within
the State of California, requiring as a condition of em-
ployment that all first cameramen be and remain members
in good standing of Local 659, a contract with such pro-
vision being commonly known as a closed shop contract;
closed shop contracts for first cameramen between Local
659 and all employers engaged in the motion picture in-
dustry within said State have remained in full force and
effect from on or about January 1, 1943, to and including
the date of the filing of this complaint; the last agree-
ment entered into by and between lATSE, Local 659, and
all employers engaged in the production of motion pic-
tures in said State was executed in writing as of January
1, 1946, for a term ending December 31, 1948, and pro-
vides that Local 659 shall represent all first cameramen
for the purpose of collective bargaining and that em-
ployers engaged in the production of motion pictures will
employ only first cameramen who are members in good
standing of Local 659, and that Local 659 will furnish
competent men to perform the work and render the
services required by the [7] employer of first cameramen;
a labor dispute between Local 659 and employers engaged
in the production of motion pictures as aforesaid concern-
ing first cameramen would completely shut down the pro-
duction of motion pictures within the State of California
and would burden and obstruct intrastate commerce, inter-
state commerce and foreign commerce and the free flow
thereof.
International Photographers, etc. 9
VIII.
The State of California is the center within the United
States of the production of motion pictures and the ma-
jority in the amount of exposed film and value of products
in the production of motion pictures within the United
States are produced within said State; the majority of
employees engaged in the production of motion pictures
as hereinabove set forth are employed for each individual
picture produced or a lesser period; many first camera-
men, members of Local 659 and beneficiaries under said
closed shop contracts, are employed for each picture pro-
duced or for a lesser period.
IX.
Plaintifif was born on May 11, 1899, in Katowice, then
under the sovereignty of the German Empire; during the
year 1921, Katowice became under the sovereignty of
Poland; plaintiff entered the United States with a United
States immigration visa under Polish quota on or about
the 28th day of May, 1941, at the Port of New York,
all in accordance with Federal statutes as provided there-
for; plaintiff did on or about the 10th day of July, 1941,
file with the United States of America his declaration of
intention to become a citizen of the United States; on the
11th day of July, 1947, plaintiff became a citizen of the
United States of America and thereafter received his
Certificate of Naturalization from the Clerk of the above
entitled court; ever since the 1st day of July, 1941, plain-
tiff has intended to make his home within the State of
California, and ever since said date has been a resident
of the State of California, and intends to make his home
in said State [8] permanently; beginning in 1920, plain-
tiff commenced his training and experience for first'
cameraman and learned all phases of the art or craft of
10 Curtis Courant vs.
first cameraman; thereafter and until the outbreak of
World War II, plaintiif acted as first cameraman in
France, England, Italy, German, Austria and Hungary,
and for the period up until he entered the United States
was the first cameraman for in excess of 200 pictures
produced in said countries; many of said pictures were
shown and favorably received in local theaters in the
United States, including "Quo Vadis," starring Emil Jan-
nings, "Louise," starring Grace Moore, "The Human
Beast," starring Jean Gabin, and "Broken Blossoms,"
starring Dolly Haas; upon entry into the United States
in 1941, and ever since, plaintiff has had a high reputa-
tion within the United States and the State of California
as a first cameraman; the said reputation of plaintifif was
known among the employers, directors, actors and ac-
tresses of the motion picture industry within the State of
California.
X.
For the period commencing with plaintifif's entry into
the United States in 1941, to and including the end of
December, 1942, plaintifif applied for membership in ASC
and did all things requested in connection with filing his
application with ASC; that ASC refused to admit plaintiff
to membership in said union; as a result thereof plaintiff
was unable to work as first cameraman during the period
to the end of 1942.
XI.
Continuously ever since January, 1942, plaintiff has
been filing his application for membership in the manner
required by Local 659 on the forms supplied by Local
659, has deposited with Local 659 the sum of $250.00,
being one-half the initiation fee for membership in
International Photographers, etc. 11
Local 659 and has obtained the signatures of three mem-
bers of Local 659, all as required by Local 659, and has
done all things required by Local 659 of an applicant for
membership; that [9] ever since January 1, 1942, Local
659 has refused to admit plaintiff to membership therein
and, with the exceptions hereinafter noted, has refused
to permit plaintiff to work as a first cameraman for any
employer engaged in the production of motion pictures
within the State of California.
XIL
Local 659 is composed of several hundred members and
it is impractical to join all of said members as defendants
in the above entitled action; defendant Herbert Aller is
the Business Representative of all the members of Local
659 and acts for and on behalf of all members of Local
659, in connection with all their activities as described
herein, and is sued herein individually and in his repre-
sentative capacity of all members of Local 659; the mem-
bers of Local 659 and Herbert Aller have entered into a
conspiracy to deprive plaintiff of working as a first camera-
man within the State of California, and have threatened
great and irreparable damage to any employer who would
employ plaintiff as a first cameraman within said State;
that the acts constituting the conspiracy referred to are
as set forth in this complaint.
XHL
Ever since January 1, 1943, Local 659 has not admitted
to membership any first cameraman although qualified per-
sons have applied for membership and complied with all
rules and regulations relating to applicants to membership
in Local 659.
12 Curtis Courant vs.
XIV.
Defendants and members of Local 659, ever since Janu-
ary 1, 1942, have conspired together by the means of the
closed shop contracts above referred to and by means of
refusing to admit any first cameraman to membership in
said union, and by means of the other acts as set forth
in this complaint, to monopolize for themselves all posi-
tions of first cameramen within the motion picture in-
dustry in the State of California; such acts are in viola-
tion of the [10] Constitution of California, Article I,
and are an unlawful restraint on commerce and trade
within the State of California and upon interstate and
foreign commerce.
XV.
The defendants and the members of Local 659 have,
ever since January 1, 1942, known that plaintiff was a
qualified first cameraman, and that he entered the United
States on a United States immigration visa, and that he
filed his declaration of intention to become a citizen of
the United States on or about July 10, 1941, and that
since July 11, 1947, he was a citizen of the United States,
and have known that plaintiff was dependent for his
livelihood on work as a first cameraman and have known
that plaintiflf was suffering great humiliation and worry
as a result of their continued refusal to permit plaintiff
to membership in Local 659; defendants and members of
Local 659, from January 1, 1942, and continuously up to
the date of the filing of this complaint, have refused to
admit plaintiff to membership in said Local 659; each
time the application of plaintiff came before the micmber-
ship for consideration, the only question discussed was
whether plaintiff might obtain work as first cameraman,
and the membership, believing that he would, therefore
International Photographers, etc. 13
denied his application; it is useless for plaintiff to file
any further applications for or to do any other act re-
quired of applicants of Local 659.
XVI.
Ever since January 1, 1942, the Constitution of the
lATSE, Article I, Section 3 thereof, has provided that
"No person shall be eligible to membership in said Alliance
who is not a citizen of the United States or Canada, or
of any other territory in which the Alliance exercises
jurisdiction;" the defendants and members of Local 659
consider said provision to be binding on each of them and
have, ever since January 1, 1942, until July 11, 1947, as
one of the grounds of refusal refused to admit plaintiff
to membership in the [11] lATSE and Local 659 under
and by virtue of said provision of their Constitution.
XVII.
The By-Laws of Local 659 and the members thereof
for more than a year last past have provided that no
first cameraman shall be admitted to said union.
XVIII.
Ever since January 1, 1942, defendants and members
of Local 659 have refused to admit plaintiff as a mem-
ber and in connection therewith have never advised plain-
tiff of any reason for denial of membership except that
such membership was contrary to their Constitution or
that employment as first cameraman was desired for the
members of Local 659.
XIX.
Continuously, ever since plaintiff entered the United
States, plaintiff has received offers of employment as first
cameraman from employers engaged in the production of
14 Curtis Courant vs.
motion pictures as aforesaid within the State of Cali-
fornia on the condition that plaintiff for the period end-
ing 1942, be a member of ASC, and thereafter on the
condition that plaintiff be a member of Local 659; that
plaintiff has been unable to accept said offers because he
was not a member of said unions, with the exception that
defendants permitted plaintiff to be employed by employ-
ers on three productions of motion pictures, one in 1945,
entitled ''Mad Wednesday," produced by California Pic-
tures Corporation, another in 1946, entitled "Monsieur
Verdoux," produced by Charlie Chaplin Studios, and an-
other in 1947, entitled "Song of My Heart," produced by
Allied Artists Corporation, under the terms and condi-
tions as laid down by the defendants; said terms and
conditions were as follows: Plaintiff could not look into
the camera, nor touch the camera, nor give any order
or direction to any of the camera crew, and plaintiff's
employer was required to employ an extra union first
cameraman; that plaintiff carefully [12] carried out all
of these demands and conditions of defendants and plain-
tiff did have responsibility in connection with these three
motion pictures produced in the State of California for
the artistic effect on the screen, acting via the director
of the motion picture through the extra union first camera-
man, during 1946, Warner Bros. Pictures, Inc. offered
employment to plaintiff on the motion picture "Possessed,"
starring Joan Crawford, under the same terms and con-
ditions as laid down b}^ defendants, but defendants re-
fused to permit Warner Bros. Pictures, Inc. to so em-
ploy plaintiff; with the exception of the three employ-
ments referred to it has been and will be impossible for
plaintiff to obtain similar employment under said terms
and conditions as laid down by the defendants; that for
said work on said three motion pictures as an employee
International Photographers, etc. 15
of the producers of motion pictures within the State of
CaHfornia plaintiff was paid approximately $19,000.00 for
a period of approximately eight months' work; plaintiff
during the time of World War II was requested to act
as first cameraman for a period of approximately five
months for the War Department of the United States
Government and was paid a sum of approximately $800.00
therefor.
XX.
But for the action of the defendants as set forth in
this complaint for the period beginning January 1, 1943,
to the date of the filing of this complaint, plaintiff would
have earned the sum of $125,000.00, excluding therefrom
the amounts plaintiff earned as hereinabove set forth, and
the plaintiff has been damaged by the acts of the defend-
ants and members of Local 659 in the amount of
$125,000.00.
XXI.
The defendants and members of Local 659 threaten to
and will continue to prevent plaintiff from becoming a
member of the union and will prevent him from following
his occupation of first cameraman within the State of
California for the remainder of [13] plaintiff's active life
as a first cameraman, to the damage of plaintiff in the
sum of $250,000.00.
XXII.
That plaintiff has suffered great humiliation, worry,
frustration and loss of prestige from the acts of the de-
fendants complained of, to his damage in the sum of
$100,000.00.
16 Curtis Courant vs.
XXIII.
The defendants for many years past and ever since
January 1, 1942, have been warned that their refusal to
admit persons to membership under the conditions outlined
herein was in violation of law, but, nevertheless, the de-
fendants have sought to deprive plaintifif of his rights un-
der the Constitution of the United States, Treaties and
Statutes of the United States for the selfish purpose of
maintaining all the jobs of first cameraman for the mem-
bers of Local 659, and that the aforesaid actions of the
defendants are wanton, wilful and malicious and that
exemplary damages should be imposed on defendants in
the sum of $500,000.00.
Wherefore, plaintiff prays for judgment against the
defendants :
1. For loss of earnings in the sum of $125,000.00, and
that the same be trebled;
2. For loss of future employment in the sum of
$250,000.00, and that the same be trebled;
3. For general damages in the sum of $100,000.00,
and that the same be trebled;
4. For exemplary damages in the sum of $500,000.00;
and
5. For reasonable attorney's fees, costs of suit in-
curred and for such other relief as may be meet and just
in the premises.
HENRY B. ELY
Attorney for Plaintifif
[Endorsed] : Filed Apr. 6, 1948. Edmund L. Smith,
Clerk. [14]
International Photographers, etc. 17
[Title of District Court and Cause]
MOTIONS BY DEFENDANTS INTERNATIONAL
PHOTOGRAPHERS OF THE MOTION PIC-
TURE INDUSTRY LOCAL 659, AN UNIN-
CORPORATED LABOR ORGANIZATION,
HEREINAFTER REFERRED TO AS DEFEND-
ANT LOCAL, AND HERBERT ALLER, IN-
DIVIDUALLY AND AS REPRESENTATIVE
OF THE MEMBERS OF SAID LOCAL 659,
HEREINAFTER REFERRED TO AS DEFEND-
ANT ALLER, TO DISMISS
The Defendant Local and Defendant Aller, and Each
of Them, Severally Move the Court as Follows:
( 1 ) To dismiss the action on the ground that the Court
lacks jurisdiction over the subject matter for the reason
that jurisdiction is not vested in this Court by the Con-
stitution of the United States, Article 1, Section 8, Article
6, the Fifth Amendment to the Constitution of the United
States, the Fourteenth [15] Amendment to the Constitu-
tion of the United States; the National Labor Relations
Act, 29 U. S. C. A. 151-166, enacted July 5, 1935; Labor
Management Relations Act of 1947, 29 U. S. C A. 141-
197, enacted June 23, 1947; the Treaty between the United
States and Poland of Friendship, Commerce and Consular
Rights, 48 Stat. L. 1507; 28 U. S. C A. 41 (1, 8, 12, 13,
14, 17, 23) ; 8 U. S. C A. 41, 43, under color of Sections
921-923 Labor Code, State of California, and the laws
of the State of CaHfornia, 8 U. S. C. A. 47, 48; 15
U. S. C. A. 15) ; nor by any provision of the Constitution
of the United States; nor by any provision of the Statutes
or Laws of the United States ; nor by any provision of any
treaty to which the United States is a party.
18 Curtis Courant vs.
(2) To dismiss the action on the ground that the Court
lacks jurisdiction because, as appears from the face of
the Complaint, the diversity of citizenship necessary for
jurisdiction does not exist.
(3) To dismiss the action as to the Defendant Local
because the Complaint fails to state a claim against said
defendant upon which relief can be granted.
(4) To dismiss the action as to Defendant Aller be-
cause the Complaint fails to state a claim against said
defendant upon which relief can be granted.
(5) To dismiss the action because the Complaint fails
to state a claim against the Defendant Local or Defendant
Aller, jointly or severally, upon which relief can be
granted.
This motion will be made upon the Complaint on file
herein, the Notice of Motion and Points and Authorities
in support thereof, and the Affidavit of Defendant Aller,
hereto attached, by reference incorporated herein and
made a part hereof. [16]
Dated: April 26, 1948.
BODKIN, BRESLIN & LUDDY
HENRY G. BODKIN
GEORGE M. BRESLIN
MICHAEL G. LUDDY
By Michael G. Luddy
453 South Spring Street
Los Angeles 13, California
Phone: MUtual 3151
Attorneys for Defendants International Photographers of
the Motion Picture Industry Local 659, an Unincor-
porated Labor Organization, and Herbert Aller, In-
dividually and as Representative of the Members of
Said Local 659
International Photographers, etc. 19
NOTICE OF MOTION
To: Henry B. Ely, Esq.
453 South Spring Street
Los Angeles 13, California
Attorney for Plaintiff
Please Take Notice that the undersigned will bring the
above motions on for hearing before this Court at the
Court Room of the Honorable J. F. T. O'Connor, Court
Room No. 7 of the United States Post Office and Court
House Building, in the City of Los Angeles, County of
Los Angeles, State of California, on Monday, the 10th
day of May, 1948, at 10:00 o'clock in the forenoon of
that day, or as soon thereafter as counsel may be heard.
Dated: April 26, 1948.
BODKIN, BRESLIN & LUDDY
HENRY G. BODKIN
GEORGE M. BRESLIN
MICHAEL G. LUDDY
By Michael G. Luddy
453 South Spring Street
Los Angeles 13, California
Phone: MUtual 3151
Attorneys for Above Named Defendants [17]
Received copy of the within Motions, etc., to Dismiss
and Notice thereof this 26th day of April, 1948. Henry B.
Ely, Attorney for Plaintiff.
[Endorsed] : Filed Apr. 26, 1948. Edmund L. Smith,
Clerk. [18]
20 Curtis Courant vs.
[Title of District Court and Cause]
MOTION BY DEFENDANT THE INTERNATION-
AL ALLIANCE OF THEATRICAL STAGE EM-
PLOYEES AND MOTION PICTURE MA-
CHINE OPERATORS OF THE UNITED
STATES AND CANADA (SUED HEREIN AS
DOE 1), HEREINAFTER REFERRED TO AS
THE ALLIANCE, TO DISMISS
Defendant The Alliance Moves the Court as Follows:
( 1 ) To dismiss the action on the ground that the Court
lacks jurisdiction over the subject matter for the reason
that jurisdiction is not vested in this Court by the Con-
stitution of the United States, Article 1, Section 8, Ar-
ticle 6, the Fifth Amendment to the Constitution of the
United States, the Fourteenth Amendment to the Con-
stitution of the United States; the National Labor Rela-
tions Act, 29 U. S. C. A. 151-166, enacted July 5, 1935;
[19] Labor Management Relations Act of 1947, 29 U. S.
C. A. 141-197, enacted June 23, 1947; the Treaty between
the United States and Poland of Friendship, Commerce and
Consular Rights, 48 Stat. L. 1507; 28 U. S. C. A. 41 (1,
8, 12, 13, 14, 17, 23) ; 8 U. S. C. A. 41, 43, under color
of Sections 921-923 Labor Code, State of California, and
the laws of the State of CaHfornia, 8 U. S. C. A. 47, 48;
15 U. S. C. A. 15) ; nor by any provision of the Constitu-
tion of the United States; nor by any provision of the
Statutes or Laws of the United States; nor by any pro-
vision of any treaty to which the United States is a party.
International Photographers, etc. 21
(2) To dismiss the action on the ground that the Court
lacks jurisdiction because, as appears from the face of
the Complaint, the diversity of citizenship necessary for
jurisdiction does not exist.
(3) To dismiss the action because the Complaint fails
to state a claim against said defendant upon which relief
can be granted.
This motion will be made upon the Complaint on file
herein, the Notice of Motion and Points and Authorities
in support thereof, and the Affidavit of Roy M. Brewer,
hereto attached, by reference incorporated herein and
made a part hereof.
Dated: April 28, 1948.
BODKIN, BRESLIN & LUDDY
HENRY G. BODKIN
GEORGE M. BRESLIN
MICHAEL G. LUDDY
By Michael G. Luddy
453 South Spring Street
Los Angeles 13, California
Phone: MUtual 3151
Attorneys for Defendant The Alliance [20]
22 Curtis Coiirant vs.
NOTICE OF MOTION
To: Henry B. Ely, Esq.
453 South Spring Street
Los Angeles 13, California
Attorney for Plaintiff
Please Take Notice that the undersigned will bring the
above motion on for hearing before this Court at the
Court Room of the Honorable J. F. T. O'Connor, Court
Room No. 7 of the United States Post Office and Court
House Building, in the City of Los Angeles, County of
Los Angeles, State of California, on Monday, the 10th
day of May, 1948, at 10:00 o'clock in the forenoon of
that day, or as soon thereafter as counsel may be heard.
Dated: April 28, 1948.
BODKIN, BRESLIN & LUDDY
HENRY G. BODKIN
GEORGE M. BRESLIN
MICHAEL G. LUDDY
By Michael G. Luddy
453 South Spring Street
Los Angeles 13, California
Phone: MUtual 3151
Attorneys for Defendant The Alliance [21]
Received copy of the within Motion, etc., to Dismiss
and Notice thereof this 28th day of April, 1948. Henry
B. Ely, Attorney for Plaintiff.
[Endorsed] : Filed Apr. 28, 1948. Edmund L. Smith,
Clerk. [22]
International Photographers, etc. 23
[Title of District Court and Cause]
AMENDMENT TO COMPLAINT
Plaintiff amends his complaint on file herein as fol-
lows:
I.
By adding to paragraph I of the complaint :
"the Preamble and Articles 1, 2, 55 and 56 of the
United Nations Charter (59 Stat. L. 1046)."
11.
By adding to paragraph XVI, at the end thereof, the
following :
"Such provision of the Constitution of the lATSE
is unreasonable, arbitrary, capricious and without
justification."
III.
By adding to paragraph XVII, at the end thereof, the
following: [23]
"That such provisions of the By-Laws of Local 659
are unreasonable, arbitrary, capricious and without
justification."
HENRY B. ELY
Attorney for Plaintiff
[Endorsed] : Filed May 10, 1948. Edmund L. Smith,
Clerk. [24]
24 Curtis Courant vs.
[Title of District Court and Cause]
OPINION
Henry B. Ely, Los Angeles, California,
representing the plaintiff.
Bodkin, Breslin & Luddy, Los Angeles,
California, representing the defendants.
O'Connor, J. F. T., Judge.
This is an action by the plaintiff, Curtis Courant,
against International Photographers of the Motion Pic-
ture Industry Local 659, an unincorporated labor organi-
zation, et al. The complaint was filed on April 6, 1948
and amendment filed May 10, 1948.
In his statement of the case, the plaintiff stated the
in his brief [O'Connor, Judge]
controversy /^ as follows :
"Plaintiff as an alien with Declaration of Intention on
file, and as a citizen, filed his complaint for damages in
the above action on the ground that defendants both re-
fused to permit him to work because of their closed shop
agreement, and refused to admit him to membership in
their unions." There seems to be a contradiction in the
statement: plaintiff could not be both an alien with dec-
laration on file, and a citizen. However, the allegation in
the complaint is controlling, which states as follows: [25]
". . . on the 11th day of July, 1947, plaintiff became
a citizen of the United States of America and thereafter
received his certificate of naturalization from the clerk
of the above entitled court; ever since the first day of
International Photographers, etc. 25
July, 1941, plaintiff has intended to make his home within
the State of California and ever since said date has been
a resident of the State of California and intends to make
his home in said state permanently . . ."
The plaintiff alleges he complied with all of the rules
and regulations of Local 659 in filing his application for
membership, and deposited with Local 659 the sum of
$250.00, being one-half of the initiation fee for member-
ship, and, further, obtained the signature of three mem-
bers of Local 659, and has done all things required of an
applicant for membership. Notwithstanding this compli-
ance, he has been denied membership.
Plaintiff further alleges:
"Defendants and members of Local 659, ever since Jan-
uary 1, 1942, have conspired together by the means of the
closed shop contracts above referred to and by means of
refusing to admit any first cameraman to membership in
said union, and by means of the other acts as set forth in
this complaint, to monopolize for themselves all positions
of first cameramen within the motion picture industry in
the State of California; such acts are in violation of the
Constitution of California, Article I, and are an unlaw-
ful restraint on commerce and trade within the State of
California and upon interstate and foreign commerce."
On April 26, 1948 the defendants filed a motion to dis-
miss the complaint on the following grounds —
''(1) To dismiss the action on the ground that the
Court lacks jurisdiction over the subject matter for the
26 Curtis Courant vs.
[26] reason that jurisdiction is not vested in this Court
by the Constitution of the United States, Article 1, Sec-
tion 8, Article 6, the Fifth Amendment to the Constitution
of the United States, the Fourteenth Amendment to the
Constitution of the United States; the National Labor Re-
lations Act, 29 U. S. C. A. 151-166, enacted July 5,
1935; Labor Management Relations Act of 1947, 29 U. S.
C. A. 141-197, enacted June 23, 1947; the Treaty be-
tween the United States and Poland of Friendship, Com-
merce and Consular Rights, 48 Stat. L. 1507; 28 U. S.
C A. 41 (1, 8, 12, 13, 14, 17, 23) ; 8 U. S. C. A. 41, 43,
under color of Sections 921-923 Labor Code, State of
CaHfornia, and the laws of the State of California, 8 U. S.
C. A. 47, 48; 15 U. S. C. A. 15) ; nor by any provision of
the Constitution of the United States ; nor by any provision
of the Statutes or Laws of the United States; nor by any
provision of any treaty to which the United States is a
party.
"(2) To dismiss the action on the ground that the
Court lacks jurisdiction because, as appears from the face
of the Complaint, the diversity of citizenship necessary
for jurisdiction does not exist.
"(3) To dismiss the action as to the Defendant Local
because the Complaint fails to state a claim against said
defendant upon which relief can be granted.
''(4) To dismiss the action as to Defendant Aller be-
cause the Complaint fails to state a claim against said
defendant upon which relief can be granted.
International Photographers, etc. 27
"(5) To dismiss the action because the Complaint fails
to state a claim against the Defendant Local or Defend-
ant Aller, jointly or severally, upon which relief can be
granted. [27]
"This motion will be made upon the Complaint on file
herein, the Notice of Motion and Points and Authorities
in support thereof, and the Affidavit of Defendant Aller,
hereto attached, by reference incorporated herein and
made a part hereof."
A similar action was filed in this court and decided by
Judge Ben Harrison:
Schatte, et al. v. International Alliance, etc., et al.,
70 Fed. Supp. 1008; Affirmed: 165 Fed. (2d)
216. (Petition for Writ of Certiorari denied by
the Supreme Court of the United States.) (8
U. S. Sup. Ct. Bulletin No. 23, p. 1327; 16 Law
Week 3316 and 3332.)
The motion of defendants to dismiss is granted.
Exception allowed the plaintiff.
Dated at Los Angeles, California, this 27th day of May,
1948.
J. F. T. O'CONNOR
United States District Judge
[Endorsed] : Filed May 27, 1948. Edmund L. Smith,
Clerk. [28]
28 Curtis Coiirant vs.
In the District Court of the United States for the
Southern District of California
Central Division
No. 8104, O'C
CURTIS COURANT,
Plaintiff,
-vs.
INTERNATIONAL PHOTOGRAPHERS OF THE
MOTION PICTURE INDUSTRY LOCAL 659,
an unincorporated Labor Organization, et al.,
Defendants.
JUDGMENT OF DISMISSAL FOR LACK OF
JURISDICTION
The motions of the defendants International Photo-
graphers of the Motion Picture Industry Local 659, an
unincorporated labor organization. The International Al-
liance of Theatrical Stage Employees and Motion Picture
Machine Operators of the United States and Canada, an
unincorporated labor organization, and Herbert Aller, in-
dividually, and as representative of the members of said
Local 659, for the dismissal of the above entitled action
for lack of jurisdiction of this Court, having heretofore
been submitted to this Court for determination, and it
appearing that this Court lacks jurisdiction to proceed
in said action: [29]
It is therefore ordered, adjudged and decreed that the
above entitled action be and is hereby dismissed for lack
of jurisdiction.
International Photographers, etc. 29
Dated: This 1st day of June, 1948.
J. F. T. O'CONNOR
Judge
Approved as to form. Henry B. Ely, Attorney for
Plaintiff. Dated: This 27th day of May, 1948.
Judgment entered Jun. 1, 1948. Docketed Jun 1, 1948.
Book C. O. B. 51, page 100. Edmund L. Smith, Clerk;
By Francis E. Cross, Deputy.
[Endorsed] : Filed Jun. 1, 1948. Edmund L. Smith,
Clerk. [30]
[Title of District Court and Cause]
NOTICE OF APPEAL TO CIRCUIT COURT OF
APPEALS UNDER RULE 73(b)
Notice Is Hereby Given that Curtis Courant, plaintiff
above-named, hereby appeals to the Circuit Court of Ap-
peals for the Ninth Circuit from the Final Judgment of
Dismissal for Lack of Jurisdiction entered in this action
on the 1st day of June, 1948.
Dated this 4th day of June, 1948.
HENRY B. ELY
Attorney for Plaintiff and Appellant,
CURTIS COURANT
[Endorsed] : Filed & mid. copy to Bodkin, Breslin &
Luddy, Attys. for Defts. Jun. 3, 1948. Edmund L. Smith,
Clerk. [31]
30 Curtis C our ant vs.
[Title of District Court and Cause]
STATEMENT OF POINTS OF PLAINTIFF AND
APPELLANT UNDER RULE 75(d)
The plaintiff and appellant will rely on the following
points on appeal to sustain jurisdiction of the District
Court :
1. The District Court has jurisdiction of the action
under the National Labor Relations Act, 29 U. S. C. A.
151-166; Fifth Amendment to the Constitution, and Ar-
ticle 1, Section 8 and Article 6 thereof; the United States
Treaty with Poland, 48 Stat. L. 1507; 28 U. S. C A. 41
(1, 8, 12, 13, 14, 17, 23) ; 8 U. S. C. A. 47-48; 15 U. S.
C. A. 15; United Nations Charter, the Preamble and Ar-
ticles 1, 2, 55 and 56 thereof (59 Stat. L. 1046) ; 8 U. S.
C. A. 41, 43, under color of Sections 921-923 Labor Code,
State of California.
2. Appellant claims rights under the National Labor
Relations Act, the Constitution, Treaties and Laws of the
United States; the District Court has jurisdiction to de-
termine whether or not appellant has any rights under
such laws. [32]
3. The Congress under the National Labor Relations
Act, has clothed appellees with monopolistic legislative
powers and under the Act and the common law applicable
thereto, appellees have violated their duty toward appel-
lant, a Federal question.
4. Appellant is an employee as defined by the National
Labor Relations Act; has been employed as First Camera-
International Photographers, etc. 31
man, has had offers of employment and appellees are
estopped from claiming appellant not to be an employee;
appellees have denied to appellant his rights as guaranteed
under Section 7 of the National Labor Relations Act.
5. If, under Congressional authority, appellees have
the right to prevent appellant from entering into a con-
tract of hire, then questions of constitutionality of the
National Labor Relations Act arise, a Federal question,
and a conflict arises between the CaHfornia Constitution
and the National Labor Relations Act.
6. The portions of the Treaty with Poland relied on
by appellant are self-executing, binding on the appellees
as congressionally clothed agencies, and in their private
capacities, and protect appellant in his accepting an offer
of hire, a Federal question.
7. The monopoly of the appellees is forbidden by the
Anti-Trust Laws, a Federal question.
Dated: June 4, 1948.
HENRY B. ELY
Attorney for Plaintiff and Appellant [Z2>]
Received copy of the within this 4th day of June, 1948.
Michael G. Luddy, Attorney for Defendants.
[Endorsed] : Filed Jun. 4, 1948. Edmund L. Smith.
Clerk. [34]
32 Curtis Coiirant vs.
[Title of District Court and Cause]
CERTIFICATE OF CLERK
I, Edmund L. Smith, Clerk of the District Court of the
United States for the Southern District of California, do
hereby certify that the foregoing pages numbered from 1
to 36, inclusive, contain full, true and correct copies of
Complaint; Motions of Defendants International Photo-
graphers of the Motion Picture Industry Local 659 et al.
and International Alliance of Theatrical Stage Employees
and Alotion Picture Machine Operators of the United
States and Canada to Dismiss; Amendment to Complaint;
Opinion; Judgment of Dismissal for Lack of Jurisdic-
tion; Notice of Appeal; Statement of Points under Rule
75(d); and Stipulation as to Record under Rule 75(f)
which constitute the record on appeal to the United States
Circuit Court of Appeals for the Ninth Circuit.
I further certify that my fees for preparing, comparing,
correcting and certifying the foregoing record amount to
$9.70 which sum has been paid to me by appellant.
Witness my hand and the seal of said District Court
this 13 day of July, A. D. 1948.
(Seal) EDMUND L. SMITH
Clerk
By Theodore Hocke
Chief Deputy
International Photographers, etc. 33
[Endorsed] : No. 11972. United States Circuit Court
of Appeals for the Ninth Circuit. Curtis Courant, Ap-
pellant, vs. International Photographers of the Motion
Picture Industry Local 659, etc., et al.. Appellees. Tran-
script of Record. Upon Appeal From the District Court
of the United States for the Southern District of Cali-
fornia, Central Division.
Filed July 14, 1948.
PAUL P. O'BRIEN
Clerk of the United States Circuit Court of Appeals for
the Ninth Circuit
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry Local 659, etc., et al.,
Appellees.
OPENING BRIEF OF APPELLANT.
Henry B. Ely,
453 South Spring Street, Los Angeles 13,
Attom^ior Appellant.
np^
Parker & Company, Law Printers, Los Angeles. Phone TR. 5306.
'■^■^.■^■■a--^^^
TOPICAL INDEX
PAGE
Preliminary statement 1
Statement of the case 5
Statement of facts 10
Error No. 1. The District Court erred in rendering a judgment
of dismissal for lack of jurisdiction 13
Points of Law 14
I.
The District Court has jurisdiction of the action under the
National Labor Relations Act, the Treaty with Poland, the
United Nations Charter and the express provisions of the
Judicial Code 14
A. The rights of appellant and duties of appellees under
the National Labor Relations Act of 1935 14
B. Appellant, a citizen of the Republic of Poland, was, by
the Treaty Between the United States and Poland of
Friendship, etc., guaranteed certain rights denied him
by appellees 27
C. The appellant claims under rights guaranteed by the
United Nations Charter 31
II.
Under the National Labor Relations Act, Congress has clothed
appellees with an exclusive franchise, and under the act
and the common law applicable thereto, appellees have vio-
lated their duty toward appellant, a federal question 34
III.
If, acting under congressional authority, ap]Xillees have the
right to prevent appellant from entering into a contract of
hire, then grave questions of the constitutionality of the
National Labor Relations Act arise, a federal question 37
11.
PAGE
IV.
Appellant claims rights under the National Labor Relations
Act, the statutes, treaties and laws of the United States;
the District Court has jurisdiction to determine whether or
no appellant has any rights under such laws 43
V.
Appellant is an employee as defined by the National Labor Re-
lations Act; has been employed as first cameraman and has
had offers of employment. Appellees are estopped from
claiming appellant is not an employee 45
Conclusion , 49
m.
TABLE OF AUTHORITIES CITED
Cases. page
Adams v. Tanner, 244 U. S. 590, 37 S. Ct. 662, 61 L. Ed.
1336, L. R. A. 1917F 1163, Ann. Cas. 1917D 973 38, 39
Allgeyer v. Louisiana, 165 U. S. 578, 17 S. Ct. 427, 41 L.
Ed. 832 38, 40
American Federation of Labor v. Watson, 327 U. S. 582, 66
S. Ct. 761, 90 L. Ed. 873 43, 44
Asakura v. Seattle, 265 U. S. 332, 44 S. Ct. 515, 68 L. Ed.
1041 30
Bacardi Corp. v. Domenech, 311 U. S. 150, 61 S. Ct. 219, 85
L. Ed. 98 30
Bautista v. Jones, 25 Cal. 2d 746, 155 P. 2d 343 38, 41, 42
Betts V. Easley, 161 Kan. 459, 169 P. 2d 831, 166 A. L. R.
342 15, 22, 24, 26, 38
Booth V. Illinois, 184 U. S. 425, 22 S. Ct. 425, 46 L. Ed. 623.... 38
Brotherhood of Locomotive Firemen v. Tunstall, 163 F. 2d
289 15, 21, 26
Buchanan v. Warley, 245 U. S. 60, 38 S. Ct. 16, 62 L. Ed.
149 37
Carroll v. Local No. 269, I. B. E. W., 133 N. J. Eq. 144, 31
A. 2d 223 35
Chicago, B. & Q. R. Co. v. McGuire, 219 U. S. 549, 31 S. Ct.
259, 55 L. Ed. 328 38, 40
Cook V. United States, 288 U. S. 102, 53 S. Ct. 305, 77 L.
Ed. 641 30
Deitrick v. Greaney, 309 U. S. 190, 60 S. Ct. 480, 84 L. Ed.
694 48
DeMille v. A. F. R. A., 31 Cal. 2d 139 39
Dorrington v. Manning, 4 A. 2d 886 36
Edye v. Robertson, 112 U. S. 580, 5 S. Ct. 247, 28 L. Ed. 798.... 29
Foster v. Neilson, 2 Pet. 253, 7 L. Ed. 415 29, 30
IV.
PAGE
Graham v. Southern Ry. Co., 74 Fed. Supp. 663 15, 21, 22, 26
Gulley V. First National Bank, 299 U. S. 109, 57 S. Ct. 96, 81
L. Ed. 70 44
Hines V. Davidowitz, 312 U. S. 52, 61 S. Ct. 399, 85 L. Ed.
581 30
Holden V. Joy, 17 Wall. 211, 21 L. Ed. 523 29
Indemnity Ins. Co. v. Pan Am. Airways, 58 Fed. Supp. 338 29
International Union v. J. I. Case Co., 250 Wis. 63, 26 N. W.
2d 305, 170 A. L. R. 933 15, 24, 25
J. I. Case Co. v. National Labor Relations Board, 321 U. S.
332, 64 S. Ct. 576, 88 L. Ed. 762 34, 37
James v. Marinship, 25 Cal. 2d 721, 155 P. 2d 329, 160 A. L.
R. 900 15, 24, 36
K. M. O. X. Broadcasting Station, 10 N. L. R. B. 479 45
King Features Syndicate v. Valley Broadcasting Co., 43 Fed.
Supp. 137 30
Missouri Pac. Rwy. Co. v. Tucker, 230 U. S. 340, 33 S. Ct.
961, 57 L. Ed. 1507 35
Mitchell V. Hitchman Coal and Coke Co., 214 Fed. 685 ; rev.
245 U. S. 229, 38 S. Ct. 65, 62 L. Ed. 260 38
Munn V. lUinois, 94 U. S. 113, 24 L. Ed. 71 35
National Labor Relations Board v. Carlisle Lumber Co., 94 F.
2d 138 48
National Labor Relations Board v. Hearst Publications, 322
U. S. Ill, 64 S. Ct. 851, 88 L. Ed. 1170 46, 47
National Labor Relations Board v. Jones & Laughlin Steel Cor-
poration, 301 U. S. 1, 57 S. Ct. 615, 81 L. Ed. 893 34
Ohio Tank Car Co. v. Keith Ry. Equipment Co., 148 F. 2d 4.... 48
Oyama v. State of CaHfornia, 332 U. S. 633, 68 S. Ct. 269 33
Phelps Dodge Corp. v. N. L. R. B., 313 U. S. 177, 61 S. Ct.
845, 85 L. Ed. 1271, 133 A. L. R. 1217 46
Race Restriction Cases, 334 U. S. 1, 68 S. Ct. 836 37
PAGE
Schatte v. International Alliance, 70 Fed. Supp. 1008; affd. 165
F. 2d 216 8, 13
Slaughter House Cases, 16 Wall. 36, 21 L. Ed. 394 35, 39, 42
Stafford V. Wallace, 258 U. S. 495. 66 L. Ed. 735, 42 S. Ct. 397.. 35
Stark V. Wickard, 321 U. S. 288, 64 S. Ct. 559, 88 L. Ed. 733.. 44
Steele v. Louisville and N. R. Co., 323 U. S. 192, 65 S. Ct.
226 6, 7, 14, 15, 18, 25
Swab V. Motion Picture Machine Operators Local No. 159, 109
P. 2d 600 36
Terrace v. Thompson, 263 U. S. 197, 68 L. Ed. 255, 44 S.
Ct. 15 31
The Peggy, 1 Cranch 103, 2 L. Ed. 49 29
The York Manufacturing Co. v. The Illinois Central Railroad,
3 Wall. 107, 18 L. Ed. 170, 70 U. S. 170 35
Trailmobile Co. v. Whirls, 331 U. S. 40, 67 S. Ct. 982 8
Truax v. Raich, 239 U. S. 33. 36 S. Ct. 7. 60 L. Ed. 131
28, 37, 38, 39
Tunstall v. Brotherhood of Locomotive Firemen, 323 U. S. 210,
65 S. Ct. 235, 89 L. Ed. 187 15, 18, 19, 20, 26, 27
United States v. Ohio Oil Co., 234 U. S. 548, 58 L. Ed. 1459,
34 S. Ct. 956 35
United States v. Percheman, 7 Pet. 51. 8 L. Ed. 604 29
United States v. 43 Gallons Whisky, 93 U. S. 188, 23 L. Ed.
846 29
Valentine v. United States, 299 U. S. 5, 57 S. Ct. 100, 81 L.
Ed. 5 30
Wallace Corp. v. N. L. R. B., 323 U. S. 248, 65 S. Ct. 238
7, 15, 19, 20. 26
West Coast Hotel Co. v. Parrish. 300 U. S. 379, 57 S. Ct.
578, 81 L. Ed. 703 38, 40, 41
Williams v. International Brotherhuod, 27 Cal. 2d 586. 165 P.
2d 903 15, 24
VI.
PAGE
Wilson V. Newspaper & Mail Deliverers' Union, 123 N. J. Eq.
347, 197 Atl. 720 35
Yick Wo V. Hopkins, 118 U. S. 356, 6 S. Ct. 1064, 30 L. Ed.
220 28, T^T, 38, 39
Z. & F. Assets Realization Corporation v. Hull, 114 F. 2d 464;
affd. 311 U. S. 470, 61 S. Ct. 351, 85 L. Ed. 288 28, 29
Miscellaneous
Shylock, "Merchant of Venice," Act IV, Scene I, line 376 39
Treaty between the United States and Poland of Friendship,
Commerce and Consular Rights, 48 Stat. L. 1507 4, 13, 27, 43
United Nations Charter, Preamble, Arts. 1, 2, 55 and 56 (59
Stat. L. 1046) 4, 32
Statutes
California Labor Code, Sec. 921 4
California Labor Code, Sec. 922 4
California Labor Code, Sec. 923 4
Labor Management Relations Act of 1947, Sec. 301(c) 4, 10
National Labor Relations Act of 1935, Sec. 1 4, 5
National Labor Relations Act of 1935, Sec. 2 4, 45, 49
National Labor Relations Act of 1935, Sec. 7
2, 4, 5, 8, 14, 35, 36, 43
National Labor Relations Act of 1935, Sec. 8 4, 36
National Labor Relations Act of 1935, Sec. 8(3) 6
National Labor Relations Act of 1935, Sec. 9 2, 4, 6
United States Code, Title 28, Sec. 1331 4
United States Code, Title 28, Sec. 1343 4
United States Code Annotated, Title 8, Sec. 41 4
United States Code Annotated, Title 8, Sec. 43 4
United States Code Annotated, Title 15, Sec. 15 4
United States Code Annotated, Title 28, Sec. 41 (1) 4, 26
vu.
PAGE
United States Code Annotated, Title 28, Sec. 41 (8) 4, 18, 27
United States Code Annotated. Title 28, Sec. 41 (12, 13, 14,
23) 4
United States Code Annotated. Title 28, Sec. 41 (17) 4, 31
United States Code Annotated, Title 28, Sec. 1331. 4, 26
United States Code Annotated, Title 28. Sec. 1337 4, 27
United States Code Annotated, Title 28, Sec. 1350. 4, 31
United States Constitution, Art. I, Sec. 8 4
United States Constitution, Art. VI 4
United States Constitution, Fifth Amendment 4, V? , 38
United States Constitution, Fourteenth Amendment 4. 7)7, 38
Textbooks
9 American Jurisprudence, p. 556 ..., 35
Restatement of Law of Torts, Sec. 810 36
Restatement of Law of Torts, Sec. 918 36
4 Ruling Case Law, p. 565 35
Vlll.
INDEX TO APPENDICES
PAGE
Appendix "A" 1
Constitution of the United States:
Article I, Sec. 8 1
Article VI 1
Fifth Amendment 1
Fourteenth Amendment — -- 1
Appendix "B" 2
National Labor Relations Act of 1935 :
Section 1 (29 U. S. C. A. 151) 2
Section 2 (3) (29 U. S. C. A. 152) 3
Section 7 (29 U. S. C. A. 157) 3
Section 8 (3) (29 U. S. C. A. 158) 3
Section 9 (a) (29 U. S. C. A. 159) 3
Appendix "C" 4-
Treaty Between the United States and Poland of Friendship,
Commerce, Consular Rights ; Proclaimed July 10, 1933 ; 48
Stat, at L. 1507 4
Appendix "D" 8
Charter of the United Nations, 59 Stat, at L. 1046 8
Chapter I. Purposes and Principles:
Article 1 9
Article 2 9
Article 55 1 1
Article 56 11
IX.
PAGE
Appendix "E" 12
(Old) 28 U. S. C. A. 41 (1) 12
(New) 28 U. S. C. 1331 12
(Old) 28 U. S. C. A. 41 (8) 12
(New) 28 U. S. C. 1337 12
(Old) 28 U. S. C. A. 41 (12) 12
(Old) 28 U. S. C. A. 41 (13) 13
(Old) 28 U. S. C. A. 41 (14) 13
(New) 28 U. S. C. 1343 13
(Old) 28 U. S. C. A. 41 (17) 14
(New) 28 U. S. C. 1350 14
(Old) 28 U. S. C. A. 41 (23) 14
(New) 28 U., S. C. 1337 14
Appendix "F" 15
Sections of United States Code Annotated :
8 U. S. C. A. 41 15
8 U. S. C. A. 43 15
8 U. S. C. A. 47 (3) 15
Appendix "G" 16
Sections of Labor Code, State of California :
Section 921 16
Section 922 16
Section 923 17
Appendix "H" 18
Labor Management Relations Act, 1947, Section 301 (c) 18
Appendix "I" 18
15 U. S. C. A. 15 18
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry Local 659, etc., et al.,
Appellees.
OPENING BRIEF OF APPELLANT.
Preliminary Statement.
The appellant filed a civil action for damages in the
Federal District Court against the appellee unions and
their representatives. The appellant alleged that he came
to this country in 1941, with twenty years' experience as
a first cameraman in the motion picture business. The
complaint states that from the date of his arrival to the
time of the filing of the complaint, April 6, 1948, the first
cameramen in the industry, acting through their exclusive
bargaining representatives under the National Labor Re-
lations Act, prevented appellant from working because of
non-membership in their unions, and at the same time re-
fused to admit him to membership. Appellant further al-
leged that from 1941 until 1947 the unions would not act
favorably upon his applications for membership because
— 2—
he was not a citizen; from 1947, when he became a citi-
zen, until the fihng of this action, the unions turned down
his appHcations, saying that no more first cameramen
would be admitted to the unions. Ever since January,
1943, while the appellee unions acted as exclusive bargain-
ing representatives, they refused to permit appellant to
work (except on three occasions) although appellant had
continuous offers of employment. The appellant alleged
that the motion picture industry, in which he had been
offered employment, affected interstate commerce within
the meaning of the National Labor Relations Act [Tr.
2-16, 23]. The claim of appellant is founded on his right,
under Section 7 of the National Labor Relations Act, to
join labor organizations and on the duties of appellee
unions to appellant, as the exclusive bargaining repre-
sentatives of all camermen under Section 9 of the same act.
The appellee unions filed motions to dismiss for lack
of jurisdiction [Tr. 17-21] and after Opinion [Tr. 24-27]
the District Court rendered its Judgment of Dismissal for
lack of jurisdiction [Tr. 28-29].
The sole question presented by the appeal in this case
is whether or not a Federal Court should determine the
rights, if any. of the appellant under the Constitution of
the United States, the National Labor Relations Act, the
Polish Treaty, and the other statutes hereinafter referred
to. In other words, has the appellant, under his pleadings,
raised a substantial question as to whether or not he has
any protection under Federal law which would require the
Federal District Court to decide either for or against him,
under the provisions of the Federal Constitution and
statutes upon which he relies. This Court need not decide
what those rights are, but merely direct the District Court
to adjudicate the questions.
— 3—
We quote from Paragraph I of appellant's complaint
as amended, which sets forth the grounds of Federal
jurisdiction :
''Jurisdiction is founded on the existence of a
Federal question and the amount in controversy, and
on the existence of a question arising under the
United States Constitution, Treaty and under par-
ticular Federal statutes.
"The action arises under the Constitution of the
United States, Article 1, Section 8, Article 6, the
Fifth Amendment to the Constitution of the United
States, the Fourteenth Amendment to the Constitu-
tion of the United States ; the National Labor Rela-
tions Act, 29 U. S. C. A. 151-166, enacted July 5,
1935; Labor Management [2] Relations Act of 1947,
29 U. S. C. A. 141-197, enacted June 23, 1947; the
Treaty between the United States and Poland of
Friendship, Commerce and Consular Rights, 48 Stat.
L. 1507; 28 U. S. C. A. 41 (1, 8, 12, 13, 14, 17, 23) ;
8 U. S. C. A. 41, 43, under color of Sections 921-
923 Labor Code, State of California, and the laws
of the State of California, 8 U. S. C. A. 47, 48;
15 U. S. C. A. 15; the matter exceeds, exclusive of
interest and costs, the sum or value of $3,000.00; the
Preamble and Articles 1, 2, 55 and 56 of the United
Nations Charter (59 Stat. L. 1046)." [Tr. 2-3,
23.]*
♦Effective September 1, 1948,
Title 28 of United States Code was
revised and the sections of that title
above
referred to are renum-
bered as follows :
Title 28. 41 (Old)
Title
28 (New)
1
1331
8
1337
12
1343
13
1343
14
1343
17
1350
23
1337
The express provisions of the Federal law relied upon
are set forth in the Appendix as follows :
Constitution of the United Appendix ''A," page 1.
States, Article I, Section 8;
Article VI; Fifth Amendment;
Fourteenth Amendment.
National Labor Relations Act Appendix "B," page 2.
of 1935, Sections 1, 2, 7, 8
and 9.
Treaty between the United Appendix "C," page 4.
States and Poland of Friend-
ship, Commerce and Consular
Riglits, 48 Stat. L. 1507.
United Nations Charter, Pre- Appendix "D," page 8.
amble, Articles 1, 2, 55 and 56
(59 Stat. L. 1046).
28 U. S. C. A. 41 (1, 8, 12, Appendix "E," page 12.
13, 14, 17, 23) and 28 U. S.
C. 1331, 1337, 1343 and 1350.
8 U. S. C. A. 41, 43, 47. Appendix "F," page 15.
Labor Code, State of Cali- Appendix "G," page 16.
fornia, Sections 921-923.
Labor Management Relations Appendix ''H," page 18.
Act, 1947, Section 301(c).
15 U. S. C. A. 15. Appendix 'T," page 18.
— 5—
Statement of the Case.
We ai-e not concerned in this case with the relative
rights and duties of unions as they may have existed
prior to the National Labor Relations Act of 1935, Until
1935, so far as the Federal Government was concerned,
labor unions were left relatively free to gain what strength
they might in a "dog eat dog" fight with employers. The
employer had the advantage of discharging a union em-
ployee as soon as he wore his union badge, refusing to
negotiate with representatives of the employees, obtain-
ing "yellow dog" contracts, and with the use of labor
spies the employer could effectively crush the unionization
of his employees. All of these practices became unlawful
under the National Labor Relations Act of 1935, and under
that Act the Federal Government gave a direct grant of
power to employees and their labor unions.
The basic grants of power to employees follow from
the preamble to the National Labor Relations Act of
1935 (Section 1), set forth in Appendix B at page 2
The preamble found that individual employees did not
"possess full freedom of association or actual liberty of
contract" and that "protection by law of the rights of
employees to organize and bargain collectively" safeguards
commerce ; to eliminate obstructions to commerce it was
necessary to protect "the exercise by workers of full free-
dom of association, self organization, and designation of
representatives of their own choosing." Section 7 of the
National Labor Relations Act of 1935 (Appendix B, p.
3) guaranteed the following rights to employees:
"Employees shall have the right to self-organiza-
tion, to form, join, or assist labor organizations, to
bargain collectively through representatives of their
own choosing, and to engage in concerted activities,
for the purpose of collective bargaining or other
mutual aid or protection."
Under Section 9 (a) (Appendix B, p. 3) of the Act
representatives designated or selected by the majority of
the employees are the exclusive representatives of all em-
ployees for the purpose of collective bargaining in respect
to rates of pay, wages, hours of employment, or other
conditions of employment. Employees are also given the
right to enter into a closed shop contract with the em-
ployer under the provisions of Section 8(3) (Appendix
B, p. 3).
Under these provisions of the National Labor Relations
Act the employee is given the right to designate repre-
sentatives of his own choosing and these representatives
when selected by a majority have exclusive bargaining
rigfhts for all members of the class to set the terms and
conditions of work. The rights and duties of such a
representative have been analyzed and construed by the
United States Supreme Court on a number of occasions
and, as a result, certain principles have been established
which govern the duties of representatives both under the
National Labor Relations Act and the Railroad Labor
Act, which has comparable provisions. One of those is
the principle that powers exercised by the unions are con-
gressionally clothed and comparable to a legislative body.
The opinion of Mr. Chief Justice Stone in Steele v. Louis-
ville and N. R. Co., 323 U. S. 192, 65 S. Ct. 226, states:
"Congress has seen fit to clothe the bargaining rep-
resentatives with powers comparable to those pos-
sessed by a legislative body both to create and restrict
the rights of those whom it represents, cf. J. L Case
—7—
Co. V. National Labor Relations Board, supra, 321
U. S. 335, 64 S. Ct. 579, but it has also imposed on
the representative a corresponding duty."
Steele v. Louisville and N. R. Co., 323 U. S. 192,
202, 65 S. Ct. 226, 232.
Another principle established is that the exclusive bar-
gaining agency is the agent of all members of the class
whether or not they are members of the bargaining union.
"The duties of a bargaining agent selected under
the terms of the Act extend beyond the mere repre-
sentation of the interests of its own group members.
By its selection as bargaining representative, it has
become the agent of all the employees, charged with
the responsibility of representing their interests fairly
and impartially."
Wallace Corp. v. N. L. R. B., 323 U. S. 248, 255,
65 S. Ct. 238, 241-242.
The union, as bargaining agent, has duties comparable
to that of a trustee in its relation to all members of the
class which it represents.
'Tt is to be noted that the seniority rights of
Whirls were bargained away from him by a union
which, under the National Labor Relations Act, was
entitled to bargain as his representative. The Act
makes the majority union 'the exclusive representa-
tives of all the employees in such unit' for bargaining.
49 Stat. 453, Sec. 9 (a), 29 U. S. C, Sec. 159 (a),
29 U. S. C. A.
■ "Sec. 159 (a). We have held that this not only
precludes the individual from being represented by
others but also prevents him from bargaining for
himself. /. /. Case Co. v. National Labor Relations
Board, 321 U. S. 332. 64 S. Ct. 576, 88 L. Ed. 762.
While the individual is thus placed wholly in the
power of the union, it does not follow that union
powers have no limit. Courts from time immemorial
have held that those who undertake to act for others
are held to good faith and fair dealing and may not
favor themselves at the cost of those they have as-
sumed to represent. The National Labor Relations
Act, in authorizing union organizations 'for the pur-
pose of collective bargaining or other mutual aid or
protection,' 49 Stat. 452, Sec. 7, 29 U. S. C, Sec. 157,
29 U. S. C. A., Sec. 157, indicates no purpose to ex-
cuse unions from these wholesome principles of trus-
teeship."
Trailmobile Co. v. Whirls, 331 U. S. 40, 67-68, 67
S. Ct. 982, 995, 996 (dissenting opinion of Mr.
Justice Jackson).
The only question of law which appears in the decision
of the District Judge [Tr. 24-27] is whether the right of
the appellant as against the appellees flows to him directly
from Section 7 of the National Labor Relations Act of
1935, and under the statutory duties of the union as the
exclusive bargaining representative, or whether he claims
under some derivative or secondary right as was involved
in Schatte v. International Alliance, 70 Fed. Supp. 1008,
affirmed C. C. A. 9, 165 F. 2d 216 (writ of certiorari
denied by Supreme Court). In the Schatte Case the plain-
tiff claimed under a contract which had been entered into
pursuant to the National Labor Relations Act, while in this
case the appellant has no rights whatsoever if those rights
are not given him directly by the National Labor Relations
Act; in fact he is claiming rights under the National
Labor Relations Act in the face of a closed shop contract
entered into by the appellee unions.
It is the claim of the appellant that he had offers of
employment in the motion picture industry and, in certain
instances, was employed by that industry; that appellee
unions, although his exclusive bargaining agent under the
statute, not only refused to admit him to membership,
arbitrarily and without reason, but also refused to permit
him to w^ork. Therefore, the appellant says that under
the decisions of the Supreme Court of the United States,
to be referred to in detail, the unions violated his rights
under the National Labor Relations Act by refusing to
represent him, refusing to treat him on an equal basis
with all other first cameramen in the bargaining unit, re-
fusing to permit him to enter into an individual contract
and performing work thereunder, and discriminated
against hini as his unwilling representative on wages,
hours and conditions of employment.
If Congress can clothe a union with exclusive bargain-
ing powers, and a union acting under such powers can
by the closed shop contract and refusal to permit qualified
persons to membership, prevent employees from contract-
ing for hire, however qualified, then grave constitutional
questions arise as to the National Labor Relations Act.
There are many questions of law and interpretations of
statutes involved in this case which will be alluded to at a
later pomt in this brief; however, the primary question
revolves around the National Labor Relations Act of 1935
and other questions are secondary.
Appellant claims damages for the years beginning 1943
to the date of the filing of the complaint, April 6, 1948,
and during most of that period the National Labor Rela-
tions Act of 1935 was in force and effect; appellant fur-
ther alleges that prior to the effective date of the Labor
—10—
Management Relations Act of 1947, the appellee unions
entered into a closed shop contract which will not expire
until December 31, 1948. This closed shop contract is
lawful under the Labor Management Relations Act of
1947. Because most of the period concerned is covered by
the Act of 1935, and because of the legality of the closed
shop contract even under the Labor Management Relations
Act of 1947, primary consideration is given to the con-
struction and effect of the 1935 Act, although, so far as
venue is concerned, Section 301 (c) of the 1947 Act is set
forth in Appendix H, page 18.
Statement of Facts.
The appellant filed his complaint for damages against
the appellee unions, International Alliance of Theatrical
Stage Employees, etc. ("lATSE"), and International
Photographers of the Motion Picture Industry, Local 659
("Local 659"), and Herbert Aller, its Business Represen-
tative. The District Court granted the motions of the ap-
pellees to dismiss for lack of jurisdiction and entered its
judgment of dismissal for lack of jurisdiction [Tr. 28-29].
For the purposes of considering the propriety of the action
of the District Court all of the facts properly pleaded in
the complaint are admitted to be true, and therefore we
will review these facts in this light.
Appellant alleges that the appellee lATSE and its local
unions are labor organizations acting as exclusive bargain-
ing representatives for all employees in the motion picture
industry in the State of California who do work in con-
nection with the filming of scenes of motion pictures, in-
cluding all labor incidental thereto, and who do all prepa-
ration, cutting and development of exposed film for ship-
ment into interstate commerce; that Local 659 is a labor
—11—
organization composed of first cameramen, and is a local
union of the lATSE; that Local 659 represents all first
cameramen in the motion picture industry in the State of
California and that all employers engaged in the production
of motion pictures within such State are under contract
with Local 659 for a term ending December 31, 1948,
whereby no person may be employed as a first cameraman
without membership in Local 659. The complaint also
points out that a labor dispute between Local 659 and the
employers would burden and obstruct interstate commerce
[Tr. 3-8].
The complaint alleges that the majority of exposed film
and value of products are produced within the State of
California, matters which are of common knowledge, and
that the majority of employees are engaged by producers
for an individual motion picture, including members of
Local 659 [Tr. 9].
Appellant was born in Europe in a portion of the
German Empire which subsequently became within the
sovereignty of the Republic of Poland, and plaintiff en-
tered the United States under the Polish quota in May of
1941. In July of that same year he filed his declaration
of intention to become a citizen and, on the 11th of July,
1947, became a citizen of the United States of America.
Appellant, with twenty years' experience, came to this
country with an international reputation as first camerman
and this reputation was well known among employers,
directors, actors and actresses in the motion picture indus-
try within the State of California. The American Society
of Cinemaphotographers, an independent union, was, up
until the end of 1942, the exclusive bargaining representa-
—12—
tive of first cameramen, and during that period appellant
was unable to obtain membership in that labor organiza-
tion, as well as unable to work as a result [Tr. 9-10].
Ever since January of 1942, plaintiff has applied for
membership in Local 659, doing all things required there-
under for membership, and ever since that date Local 659
has arbitrarily and without reason refused him member-
ship, and refused to permit appellant to work as first
cameraman for any employer engaged in the production
of motion pictures within the State of California. Ever
since January 1, 1943, Local 659 has not admitted to mem-
bership any first cameraman, although many qualified
persons have applied for membership [Tr. 9-11].
During the period that appellant was an alien he was
denied membership in the union because of the By-Law
of the lATSE that no person who was not a citizen of the
United States or Canada could be admitted to membership ;
after appellant became a citizen the By-Laws of Local 659
provided that no first cameraman should be admitted to the
union [Tr. 12-13].
Appellant has continuously, ever since he entered the
United States, been offered employment as first camera-
man, but, nevertheless, appellees refused to permit him to
work with the exception of three motion pictures, and then
under conditions that appellant could not look into the
camera, touch the camera, nor give any order or direction
to the camera crew, and with the additional requirement
that appellant's employer hire an extra union first camera-
man [Tr. 13-14].
—13—
The remaining allegations concern the damages to the
appellant [Tr. 15-16].
Appellees moved to dismiss the complaint on the ground
of lack of jurisdiction [Tr. 17-21]; the District Judge
rendered his decision based on the conclusion that the case
was covered by Schatte v. International Alliance, 70 Fed.
Supp. 1008, affirmed C. C. A. 9, 165 F. 2d 216 (writ of
certiorari denied by the Supreme Court) [Tr. 24-27], and
rendered his judgment of dismissal for lack of jurisdiction
[Tr. 28-29] ; the appellant appealed from such final judg-
ment [Tr. 29].
The question is thus squarely presented as to whether
or not an alien entering the United States under the pro-
tection of a Polish Treaty (Appendix C, p. 4), and sub-
sequently becoming a citizen of the United States of
America, has any right to be heard in the Federal Courts
when, although he has oifers of employment and has been
employed in the industry, is prevented from working
either with or without a union membership by the exclusive
bargaining agency acting under a grant of power from
the Congress of the United States, a nation not only bound
by its constitutional provisions (Appendix A, p. 1), but
also by the Charter of the United Nations (Appendix D,
p. 8).
ERROR NO. 1.
The District Court Erred in Rendering a Judgment of Dis-
missal for Lack of Jurisdiction.
—14—
POINTS OF LAW.
I.
The District Court Has Jurisdiction of the Action
Under the National Labor Relations Act, the
Treaty With Poland, the United Nations Charter
and the Express Provisions of the Judicial Code.
A. The Rights of Appellant and Duties of Ap-
pellees Under the National Labor Relations
Act of 1935.
Appellant claims the basic right guaranteed under Sec-
tion 7 of the National Labor Relations Act (Appendix B,
p. 3) to "join * * * labor organizations" and to
"bargain collectively" through representatives of his own
choosing; appellant also claims that appellee unions have
the duty as appellant's statutory representative under the
National Labor Relations Act to represent him with the
same fidelity as other first cameramen and under the Na-
tional Labor Relations Act to either admit him to member-
ship or permit him to enter into contracts of hire without
obstruction. It is the position of appellant that appellee
unions by refusing him membership and refusing to per-
mit him to work have violated the duties imposed by the
National Labor Relations Act and should respond in
damages.
The appellees are acting under a congressional grant of
power as the exclusive bargaining agency for all first
cameramen, and with such a power they have duties similar
to that of a legislature, agent and trustee to act toward
appellant without discrimination to the end that he may
freely work at his chosen trade.
Steele v. Louisville and N. R. Co., 323 U. S. 192,
65 S. Ct. 226, 89 L. Ed. 173;
—15—
TuHstall V. Brotherhood of Locomotive Firemen,
323 U. S. 210, 65 S. Ct. 235, 89 L. Ed. 187;
Wallace Corp. v. N. L. R. B., 323 U. S. 248, 65
S. Ct. 238, 89 L. Ed. 216;
Brotherhood of Locomotive Firemen v. Tunstall
(CCA. 4), 163 F. 2d 289;
Graham v. Southern Ry. Co., 74 Fed. Supp. 663 ;
Betts V. Easley, 161 Kan. 459, 169 P. 2d 831, 166
A, L. R. 342;
James v. Marinship, 25 Cal. 2d 721, 155 P. 2d 329,
160 A. L. R. 900;
V/illiams v. International Brotherhood^ 27 Cal. 2d
586, 165 P. 2d 903;
Internatiotial Union v. J. L Case Co., 250 Wis. 63,
26 N. W. 2d 305, 170 A. L. R. 933.
In Steele v. Louisville and N. R. Co., supra, the union
acted as the exclusive bargaining- representative for all
employees and made an agreement with the employer that
only white employees should be promoted to the better
position of fireman or assigned to new runs. The peti-
tioner, a negro, filed a complaint in the State Court and
the trial court sustained a demurrer which was affirmed
by the Supreme Court of the State. The Supreme Court
of the United States reversed the judgment of the State
Court and held that the union as exclusive bargaining
representative under the Railway Labor Act had a duty
to represent all employees whether members or not, and
could not arbitrarily discriminate against any member of
the group it represented, saying that the union as exclusive
bargaining representati\'e had powers not unlike a legisla-
ture and therefore was prohibited from discriminating
—16—
against anyone for whom it legislates, and that it has a
duty to protect the minority of a craft. The Court in the
course of its opinion stated:
"If, as the state court has held, the Act confers this
power on the bargaining representative of a craft or
class of employees without any commensurate statu-
tory duty toward its members, constitutional questions
arise. For the representative is clothed with power
not unlike that of a legislature which is subject to
constitutional limitations on its power to deny, restrict,
destroy or discriminate against the rights of those for
whom It legislates and which is also under an affirma-
tive constitutional duty equally to protect those rights.
If the Railway Labor Act purports to impose on
petitioner and the other Negro members of the craft
the legal duty to comply with the terms of a contract
whereby the representative has discriminatorily re-
stricted their employment for the benefit and advan-
tage of the Brotherhood's own members, we must
decide the constitutional questions which petitioner
raises in his pleading.
"But we think that Congress, in enacting the Rail-
way Labor Act and authorizing a labor union, chosen
by a majority of a craft, to represent the craft, did
not intend to confer plenary power upon the union to
sacrifice, for the benefit of its members, rights of the
minority of the craft, without imposing on it any duty
to protect the minority.
5(C 3(5 3jC 3ji Jp. 3|C 2fC 3|C
"Unless the labor union representing a craft owes
some duty to represent non-union members of the
craft, at least to the extent of not discriminating
against them as such in the contracts which it makes
as their representative, the minority would be left
—17—
with no means of protecting their interests, or in-
deed, their right to earn a livehhood by pursuing the
occupation in which they are employed.
"While the majority of the craft chooses the bar-
gaining representative, when chosen it represents, as
the Act by its terms makes plain, the craft or class,
and not the majority. The fair interpretation of the
statutory language is that the organization chosen to
represent a craft is to represent all its members, the
majority as well as the minority, and it is to act for
and not against those whom it represents. It is a
principle of general application that the exercise of a
granted power to act in behalf of others involves the
assumption toward them of a duty to exercise the
power in their interest and behalf, and that such a
grant of power will not be deemed to dispense with all
duty toward those for whom it is exercised unless so
expressed.
"We think that the Railway Labor Act imposes
upon the statutory representative of a craft at least
as exacting a duty to protect equally the interests of
the members of the craft as the Constitution imposes
upon a legislature to give equal protection to the in-
terests of those for whom it legislates. Congress has
seen fit to clothe the bargaining representative with
powers comparable to those possessed by a legislative
body both to create and restrict the rights of those
whom it represents, cf. J. I. Case Co. v. National
Labor Relations Board, supra, 321 U. S. 335, 64 S.
Ct. 579, but it has also imposed on the representative
a corresponding duty. We hold that the language of
the Act to which we have referred, read in the light
of the purposes of the Act, expresses the aim of Con-
gress to impose on the bargaining representative of a
craft or class of employees the duty to exercise fairly
—18—
the pov/er conferred upon it in behalf of all those for
whom it acts, without hostile discrimination against
them.
"So long as a labor union assumes to act as the
statutory representative of a craft, it cannot rightly
refuse to perform the duty, which is inseparable from
the power of representation conferred upon it, to
represent the entire membership of the craft. While
the statute does not deny to such a bargaining labor
organization the right to determine eligibility to its
membership, it does require the union, in collective
bargaining and in making contracts with the carrier,
to represent non-union or minority union members of
the craft without hostile discrimination, fairly, impar-
tially, and in good faith."
Steele v. Louisville and N. R. Co., 323 U. S. 192,
198, 199, 201, 202, 203, 204, 65 S. Ct. 226, 230,
231, 232, 233, 89 L. Ed. 173.
The facts in Tunstall v. Brotherhood of Locomotive
Firemen, supra, were similar to Steele v. Louisville and
N. R. Co., supra, except that in the Tunstall Case the ac-
tion was filed in the Federal District Court instead of the
State Court The United States Supreme Court held that
the duty imposed by the Railway Labor Act was a Federal
right over which the Federal Courts had jurisdiction under
28 U.S. C. A. 41 (8).
"We also hold that the right asserted by petitioner
which is derived from the duty imposed by the Rail-
way Labor Act on the Brotherhood, as bargaining
representative, is a federal right implied from the
statute and the policy which it has adopted. It is the
federal statute which condemns as unlawful the
—19—
Brotherhood's conduct. 'The extent and nature of
the legal consequences of this condemnation though
left by the statute to judicial determination, are never-
theless to be derived from it and the federal policy
which it has adopted.' Deitrick v. Greaney, 309 U. S.
190, 200, 201, 60 S. Ct. 480, 484, 485, 84 L. Ed.
1036; Board of Com'rs of Jackson County v. United
States, 308 U. S. 343, 60 S. Ct. 285, 84 L. Ed. 313;
Sola Electric Co. v. Jefferson Electric Co., 317 U. S.
173, 176, 177, 63 S. Ct. 172, 173, 174, 87 L. Ed. 165;
cf. Clearfield Trust Co. v. United States, 318 U. S.
Z6Z, 63 S. Ct. 573, 87 L. Ed. 838. The case is there-
fore one arising under a law regulating commerce of
which the federal courts are given jurisdiction by 28
U. S. C. §41(8), 28 U. S. C. A. §41(8), Judicial Code
§24(8); * * *"
Tunstall v. Brotherhood of Locomotive Firemen,
323 U. S. 210, 213, 65 S. Ct. 235, 237, 89 L. Ed.
187.
In Wallace Corp. v. N. L. R. B., supra, one union was
certified by the National Labor Relations Board as the
exclusive bargaining agency for all employees, and there-
upon signed a closed shop contract with the employer,
making a demand on the employer that members of the
other union who had lost the Board election be discharged.
The employer thereupon discharged such employees know-
ing that they were being excluded from membership in the
certified union because of their previous membership in the
losing union. The order of the National Labor Relations
Board requiring reinstatement of such employees was af-
firmed by the United States Supreme Court in an opinion
by Mr. Justice Black, who said :
'The duties of a bargaining agent selected under
the terms of the Act extend beyond the mere repre-
—20—
sentation of the interests of its own group members.
By its selection as bargaining representative, it has
become the agent of all the employees, charged with
the responsibility of representing their interests fairly
and impartially. Otherwise, employees who are not
members of a selected union at the time it is chosen
by the majority would be left without adequate repre-
sentation. No employee can be deprived of his em-
ployment because of his prior affiliation with any par-
ticular union. The Labor Relations Act was designed
to wipe out such discrimination in industrial relations.
Numerous decisions of this Court dealing with the
Act have established beyond doubt that workers shall
not be discriminatorily discharged because of their
affiliation with a union. We do not construe the pro-
vision authorizing a closed shop contract as indicating
an intention on the part of Congress to authorize a
majority of workers and a company, as in the instant
case, to penalize minority groups of workers by de-
priving them of that full freedom of association and
self-organization which it was the prime purpose of
the Act to protect for all workers."
Wallace Corp. v. N. L. R. B., 323 U. S. 248, 255,
256, 65 S. Ct. 238, 241, 242, 89 L. Ed. 216.
After the United States Supreme Court decided Tunstall
V. Brotherhood of Locomotive Firemen, supra, it was re-
manded to the District Court, which granted to the plaintiff
damages against the union (69 Fed. Supp. 826), and upon
appeal the judgment was affirmed, the Court saying:
"It is argued that the Brotherhood may not be held
liable for damages because it was given a discretion
with respect to bargaining and because it is a non-
profit organization. No authority is cited to sustain
this proposition, and we know of none. No reason
—21—
occurs to us why an organization which has used its
power as bargaining agent in violation of the rights
of those for whom it undertakes to bargain, and has
thereby inflicted injury upon one of those whom it
professes to represent, should not respond in damages
for the injury so inflicted. If liability were thought to
be a subject of doubt in such case, we might find
helpful analogy in the cases which hold to accounta-
bility an agent who has violated the duty which he
owes those for whom he acts or in the cases which
establish liability for interference with contract. It is
not necessary, however, to go to these, as the Supreme
Court in the Steele case, supra, has definitely ruled
that such liability exists. See 323 U. S. at page 207,
65 S. Ct. 226, 89 L. Ed. 173."
Brotherhood of Locomotive Firemen v. Tunstall
(C. C. A. 4), 163 F. 2d 289, 293.
In Graham v. Southern Ry. Co., supra, members of the
negro race were again discriminated against by a railroad
union which did not permit them to work diesel engines
replacing steam power. The District Court struck down
this discrimination, saying:
"We are dealing here with the law regulating the
duties of an agent toward his principal. No one is
compelled or required to undertake an agency, but one
who voluntarily assumes the task owes the duty of
acting in the utmost good faith toward his principal.
An agent is a fiduciary. If the principal is a group
of individuals, this obligation extends to each mem-
ber of the group. The agent is bound to represent the
interest of each member of the group fairly and with
equal zeal. lie may not neglect some of the members,
prefer some as against others, or discriminate among
them. He may not advance the interests of some to
—22—
the prejudice of others. This is imphcit in the fidu-
ciary relationship that exists between every agent and
his principal, be that principal a single individual or a
group of individuals.
"Applying these general principles to the situation
presented in this case, the Brotherhood was under no
obligation to become a bargaining agent for the em-
ployees within its craft. Having sought to do so, and
having been elected to that position of trust, the
Brotherhood is in duty bound to represent fairly not
only its own membership, but all the employees in
whose behalf it has authority to bargain. The
Brotherhood must advance equally and in good faith
the interests of every individual fireman whom they
represent, without preference or discrimination among
them. The only permissible distinctions may be those
based on seniority, efficiency, reliability, aptitude and
similar considerations bearing on the quality of serv-
ices rendered by the employees. No line may be
drawn arbitrarily on any other basis."
Graham v. Southern Ry. Co., 74 Fed. Supp. 663,
664, 665.
In Berts v. Easley, supra, the negro workmen sought an
injunction against their exclusive bargaining agency under
the Railway Labor Act restraining the officers of the union
from excluding them from coparticipation with the white
employees in the affairs of the union as full members.
The Supreme Court of Kansas reversed the judgment of
the trial court in sustaining the demurrer, saying :
"In the light of the history and purpose of the Act,
as construed in many decisions, the trial court's view
that the acts complained of are solely those of "a. pri-
vate association of individuals' is whollv untenable.
—23—
The acts complained of are those of an organization
acting as an agency created and functioning under
provisions of Federal law. This being true, it is un-
necessary to consider appellees' contention that the
Fifth Amendment is not here applicable because it
relates only to action by the Federal government and
not to acts of private persons. Nor do we need to
inquire whether appellees' statement as to the opera-
tion of the Fifth Amendment is too broadly stated.
In any event the constitutional guaranties of due proc-
ess, whether under the Federal or state constitutions,
are to be liberally construed to effectuate their pur-
poses, and are a restraint not only upon persons hold-
ing positions specifically classed as executive, legisla-
tive or judicial, but upon all administrative and minis-
terial officials who act under governmental authority.
16 C. J. S., Constitutional Law, §568, pp. 1148, 1149,
and cases cited Note 61. While claiming and exer-
cising rights incident to its designation as bargaining
agent, the defendant union cannot at the same time
avoid the responsibilities that attach to such statutory
status.
"It is urged, however, that since membership in the
union is voluntary and not compulsory, the petitioners
have no right to complain about limitations placed
upon membership under the constitution and by-laws
of the union. The argument is specious and un-
realistic. Note might here be taken of the allegation
that in soliciting members, prior to organization of
the local lodge, the organizer assured the plaintiffs
that all members would have equal rights and privi-
leges. But passing that, we come to a more funda-
mental matter. This court cannot be blind to present-
day realities affecting labor in large industrial plants.
—24—
The individual workman cannot just 'go it alone/
Every person with an understanding of mass produc-
tion and other features of modern industry long ago
recognized the necessity of collective bargaining by
labor representatives, freely chosen, if human rights
are to be adequately safeguarded. In the Railway
Labor Act, Congress gave clear and firm recognition
to this necessity. This liberal and enlightened view
having been written into the statute, it must follow
that a union acting as the exclusive bargaining agent
under the law, for all employees, cannot act arbitrar-
ily, cannot deny equality of privilege, to individuals or
minority groups merely because membership in the
organization is voluntary. To hold otherwise would
do violence to basic principles of our American sys-
tem."
Betts V. Easley, 161 Kan. 459, 169 P. 2d 831, 166
A. L. R. 342, 350, 351.
In James v. Marinship, supra, and Williams v. Inter-
national Brotherhood, supra, the California Supreme Court
in carefully considered opinions has set forth the duties
of the collective bargaining agency. Not even a contract
between an employer and a union w^hereby certain indi-
vidual employees are excluded from its benefits is valid
under the National Labor Relations Act. (International
Union v. J. I. Case Co., supra.) The Court in that case
held a contract invalid between a union and an employer
where there was reserved to employees not members of the
union a right to deal individually with the company. The
Court said :
" 'Exclusive representatives' for the purpose of col-
lective bargaining under the Act means the sole and
exclusive bargaining agency of all the employees it
—25—
represents for the purpose of bargaining as to rates
of pay, wages, hours of employment, or other condi-
tions of employment.
"The company cannot by contract destroy the status
of an exclusive bargaining agency created by statute.
The terms of the contract being in direct conflict with
the statute, the statute governs, and the contract is of
no effect.'*
International Union v. J. I. Case Co., 250 Wis. 63,
26 N. W. 2d 305, 170 A. L. R. 933, 939.
The appellant had numerous offers of employment and
was employed for three motion picture productions as first
cameraman. He has applied for membership in the ap-
pellee unions and has designated them as his exclusive
bargaining representatives under the applications. The
appellee unions, by virtue of statute, are his exclusive bar-
gaining agents on wages, hours and working conditions.
It is the contention of appellant that the unions, in pre-
venting him from working and refusing him membership,
have violated their duty to him under the following prin-
ciples : ^'For the representative is clothed with power not
imlike that of a legislature which is subject to constitu-
tional limitations on its power to deny, restrict, destroy or
discriminate against the rights of those for whom it legis-
lates and which is also under an affirmative constitutional
duty equally to protect those rights." (Steele v. Louisville
and N. R. Co., supra.) The statute ''does require the
union, in collective bargaining and in making contracts
with the carrier, to represent non-union or minority union
members of the craft without hostile discrimination, fairly,
impartially, ;uid in good faith." (Steele v. Loimznlle and
—26—
N. R. Co., supra.) ''It is the federal statute which con-
demns as unlawful the Brotherhood's conduct." (Tunstall
V. Brotherhood of Locomotive Firemen, supra.) ''By its
selection as bargaining representative, it has become the
agent of all the employees, charged with the responsibility
of representing their interests fairly and impartially.
Otherwise, employees who are not members of a selected
union at the time it is chosen by the majority would be left
without adequate representation." (Wallace Corp. v. N. L.
R. B., supra.) "No reason occurs to us why an organiza-
tion which has used its power as bargaining agent in
violation of the rights of those for whom it undertakes to
bargain, and has thereby inflicted injury upon one of
those whom it professes to represent, should not respond
in damages for the injury so inflicted." (Brotherhood of
Locomotive Firemen v. Tunstall, supra.) "An agent is a
fiduciary. If the principal is a group of individuals, this
obligation extends to each member of the group." (Graham
V. Southern Ry. Co., supra.) "The individual workman
cannot just 'go it alone.' Every person with an under-
standing of mass production and other features of modern
industry long ago recognized the necessity of collective
bargaining by labor representatives, freely chosen, if
human rights are to be adequately safeguarded." (Betts
V. Easley, supra.)
It is therefore under these principles that appellant asks
the Federal Court to take jurisdiction of this controversy
with appellee unions.
The Federal District Court had jurisdiction of this case
under 28 U. S. C. A. 41 (T) (now 28 U. S. C. A. 1331)
(Appendix E, p. 12), where the matter in controversy
exceeds $3,000.00 and arises under the Constitution, laws
or treaties of the United States, as well as under former
—27—
28 U. S. C. A. 41 (8) (now 28 U. S. C. A. 1337), which
gives jurisdiction to proceedings arising under any law
regulating commerce.
Tunstall v. Brotherhood of Locomotive Firemen,
323 U. S. 210, 65 S. Ct 235, 89 L. Ed. 187.
There is no allegation in the complaint and appellant
does not claim that there is any jurisdiction based on the
amount in controversy and diversity of citizenship. So
far as this subpoint in his argument is concerned, he relies
wholly on jurisdiction of the District Court under the laws
of the United States and the National Labor Relations
Act, being an Act of Congress regulating commerce.
B. Appellant, a Citizen of the Republic of Poland,
Was, by the Treaty Between the United States
and Poland of Friendship, etc.. Guaranteed Cer-
tain Rights Denied Him by Appellees.
Under the decided cases, the treaty between the United
States and Poland of Friendship, Commerce and Consular
Rights (Appendix C, p. 4) guaranteed to appellant the
rights accorded nationals of Poland under that treaty.
These rights, among others, were "to engage in * * *
commercial work of every kind; * * * ^-^ employ
agents of their choice; and generally * * * j-q enjoy
all of the foregoing privileges and to do anything inci-
dental to or necessary for the enjoyment of those privi-
leges, upon the same terms as nationals of the State of
residence * * *. Their property shall not be taken
without due process of law * * *. The nationals
* * * shall enjoy * * * such rights and privileges
as have been or may hereafter be accorded the nationals
of any other State with respect to the organization of
—28—
and participation in limited liability and other corporations
and associations, for pecuniary profit or otherwise,
* * *." (Appendix C, p. 4.)
Under similar treaties between the United States and
other countries, the Supreme Court has held without any
question as to whether or not treaties are self-executing,
that the nationals of the other countries were entitled to
work without restraint by state action.
Yick Wo. V. Hopkins, 118 U. S. 356, 6 S. Ct. 1064,
30 L. Ed. 220;
Truax v. Raich, 239 U. S. ZZ, 36 S. Ct. 7, 60 L.
Ed. 131.
An excellent exposition of the established principles
concerning treaties is found in Z. & F. Assets Realization
Corporation v. Hull (D. C. App.), 114 F. 2d 464 (af-
firmed 311 U. S. 470, 61 S. Ct. 351, 85 L. Ed. 288) :
"A treaty is primarily a compact between independ-
ent nations. It depends for the enforcement of its
provisions on the interest and the honor of the govern-
ments which are parties to it. If these fail, its in-
fraction becomes the subject of international negotia-
tions and reclamations, so far as the injured party
chooses to seek redress, which may in the end be en-
forced by actual war. It is obvious that with all this
the judicial courts have nothing to do and can give
no redress. But a treaty may also contain provisions
which confer certain rights upon the citizens or sub-
jects of one of the nations residing in the territorial
limits of the other, which partake of the nature of
municipal law, and which are capable of enforcement
as between private parties in the courts of the country.
An illustration of this character is found in treaties,
which regulate the mutual rights of citizens and sub-
—29—
jects of the contracting nations in regard to rights of
property by descent or inheritance, when the indi-
viduals concerned are ahens. The Constitution of the
United States places such provisions as these in the
same category as other laws of Congress by its decla-
ration that 'this Constitution and the laws made in
pursuance thereof, and all treaties made or which shall
be made under authority of the United States, shall
be the supreme law of the land.' A treaty, then, is a
law of the land as an act of Congress is, whenever
its provisions prescribe a rule by which the rights of
the private citizen or subject may be determined. And
when such rights are of a nature to be enforced in a
court of justice, that court resorts to the treaty for a
rule of decision for the case before it as it would to a
statute."
Z. & F. Assets Realisation Corporation v. Hull
(D. C. App.), 114 F. 2d 464, 470, 471.
The principles laid down by the Court in the Z. & F.
Assets case have been established over a long period of
time.
Bdye V. Robertson, 112 U. S. 580, 5 S. Ct. 247, 28
L. Ed. 798;
Foster v. Neilson, 2 Pet. 253, 314, 7 L. Ed. 415,
435;
U. S. V. Percheman, 7 Pet. 51, 8 L. Ed. 604;
The Peggy, 1 Cranch 103, 2 L. Ed. 49;
U. S. V. 43 Gallons Whiskv, 93 U. S. 188, 22> L. Ed.
846;
Indemnity Ins. Co. v. Pan Am. Airways (D. C.
N. Y.)", 58 Fed. Supp. 338;
Holdcn z: Joy, 17 Wall. 211, 21 L. Ed. 523, 535;
—30—
Mines v. Davidozdtz, 312 U. S. 52, 61 S. Ct. 399,
85 L. Ed. 581 ;
Valentine v. U. S., 299 U. S. 5, 57 S. Ct. 100, 81
L.Ed. 5;
King Features Syndicate v. Valley Broadcasting
Co. (D. C. Tex.), 43 Fed. Supp. 137;
Cook V. U. S., 288 U. S. 102, 53 S. Ct. 305, 77 L.
Ed. 641 ;
Bacardi Corp. v. Domenech, 311 U. S. 150, 61 S.
Ct. 219, 85 L. Ed. 98.
Mr. Chief Justice Marshall in Foster v. Neilson, supra,
said:
"Our Constitution declares a treaty to be the law
of the land. It is, consequently, to be regarded in
courts of justice as equivalent to an Act of the Legis-
lature, whenever it operates of itself without the aid
of any legislative provision. But when the terms of
the stipulation import a contract — when either of the
parties engages to perform a particular act — the
treaty addresses itself to the political, not the judicial
department; and the Legislature must execute the
contract before it can become a rule for the court."
Foster v. Neilson, 2 Pet. 253, 314, 7 L. Ed. 415,
435.
In Asakura v. Seattle, 265 U. S. 332, 44 S. Ct. 515, 68
L. Ed. 1041, the Court held that the treaty with Japan
containing similar provisions as the Polish Treaty was
self-executing and that an ordinance limiting the right of
pawnbrokers to carry on business to persons who were
citizens of the United States was void as a violation of the
treaty with Japan.
—31—
Special rights of a person who has filed his declaration
to become a citizen are considered in Terrace v. Thompson,
263 U. S. 197, 220, 68 L. Ed. 255, 276, 44 S. Ct. 15.
It is apparent under the cases above cited that appel-
lant, if deemed to have no special rights as one who
had filed his declaration to become a citizen, is entitled up
to the time when he became a citizen, to rely upon the
Polish Treaty which was self-executing and under which
he was entitled to engage in commercial work, to appoint
agents, to have the equal protection of the laws, and to
join associations. Therefore, when the appellees, as ex-
clusive bargaining agency under the National Labor Rela-
tions Act, deny him these rights, this Court has jurisdic-
tion under 28 U. S. C. A. 41 (17) (now 28 U. S. C. A.
1350) (Appendix E, p. 14), which permits an alien to file
an action in the Federal Courts for a tort arising out of a
treaty as well as under 28 U. S. C. A. 41 (1), now 28
U. S. C. 1331.
C. The Appellant Claims Under Rights Guaran-
teed BY THE United Nations Charter.
Appellees in the course of their brief in the District
Court set forth an ultimate statement concerning the
fundamental rights of the appellant, which we take the
privilege of quoting at this point ;
"That the right to follow any of the common occu-
pations of life and to pursue any calling, business or
profession one may choose is a property right to be
guarded by the proper Courts as zealously as any
other form of property, that labor is property and
—32—
that the laborer has the same right to sell his labor
and to contract with reference thereto as any other
property owner, cannot be questioned. Such rights
are natural, fundamental, inalienable rights; they
exist in all free governments."
Appellees, of course, went on to state that these rights
were not protected by the Constitution of the United States
or any statute or law of the United States. However,
they neglected to consider the United Nations Charter.
These rights which appellees say "exist in all free govern-
ments" are also guaranteed by the Constitution of the
United States, as we will subsequently point out under
Point III. The United Nations Charter (Appendix D,
p. 8) uses almost the identical words of the appellee
unions as above set forth. In the Preamble the peoples of
the United Nations reaffirm their faith in "fundamental
human rights, in the dignity and worth of the human per-
son, in the equal rights of men and women and of nations
large and small; * * *" The purposes of the United
Nations are to achieve international cooperation in "pro-
moting and encouraging respect for human rights and for
fundamental freedoms for all; * * *" (Chapter I,
Article 1, Paragraph 3.) Article 2 provides that members
shall fulfill the obligations assumed l^y them in accordance
with the purposes stated in Article 1, and Article 55 again
reemphasizes these principles which, under Article 56,
members are obliged to take joint and separate action to
achieve.
While the Charter of the United Nations was only
adopted in 1945, nevertheless four Justices of the Supreme
—33—
Court in the Alien Land Lazu case have concluded that it
is apphcablc to the internal affairs of the United States.
Oyama v. State of California, 332 U. S. 633, 68
S. Ct. 269 (the Opinion of Mr. Justice Black,
68 S. Ct. at 277; the Opinion of Mr. J'ustice
Murphy, 6^ S. Ct. at288).
Mr. Justice Black said :
"There are additional reasons now why that law
stands as an obstacle to the free accomplishment of
our policy in the international field. One of these
reasons is that we have recently pledged ourselves to
cooperate with the United Nations to 'promote -'^ * *
universal respect for, and observance of, human rights
and fundamental freedoms for all without distinction
as to race, sex, language, or religion.' How can this
nation be faithful to this international pledge if state
laws which bar land ownership and occupancy by
aliens on account of race are permitted to be en-
forced?"
Oyama v. State of California, 332 U. S. 633, 68
S. Ct. 269, at 277.
Mr. Justice Murphy said :
"Moreover, this nation has recently pledged itself,
through the United Nations Charter, to promote re-
spect for, and observance of, human rights and funda-
mental freedoms for all without distinction as to race,
sex, language and religion. The Alien Land Law
stands as a barrier to the fulfillment of that national
pledge. Its inconsistency with the Charter, which has
been duly ratified and adopted by the United States,
is but one more reason why the statute must be con-
demned."
Oyama v. State of California, 332 U. S. 633, 68
S. Ct. 269, at 288.
—34—
Therefore, under the Charter of the United Nations
estahHshing human, fundamental and natural rights which
the appellees admit "exist in all free Governments" with
the pledge of the United States as contained in the Charter
to carry out its purposes, the appellant can rely on the
Federal Courts to carry out their constitutional duties to
make effective his rights under this treaty.
IT.
Under the National Labor Relations Act, Congress
Has Clothed Appellees With an Exclusive Fran-
chise, and Under the Act and the Common Law
Applicable Thereto, Appellees Have Violated
Their Duty Toward Appellant, a Federal Ques-
tion.
The Supreme Court of the United States has set forth
the powers of unions under the National Labor Relations
Act. The employer was not only required to negotiate
with the union as the exclusive bargaining agency of its
employees, but also the Act imposed the "negative duty to
treat with no other."
A^ L. R. B. V. Jones & Lmighlin Steel Corporation,
301 U. S. 1, 57 S. Ct. 615, 81 L. Ed. 893.
Not only was the employer to deal with the exclusive
bargaining representative, and with no other union, but
also he could not make any individual contract with an
employee except the original contract of hire.
/. /. Case Co. v. N. L. R. B., 321 U. S. 332, 64
S. Ct. 576, 88 L. Ed. 762.
Under these decisions the individual or minority group
can make no contract for themselves, but must accede to
the will of the statutory representatives of the majority.
—35—
This power of exclusive representation on the part of the
unions is in the nature of an exclusive franchise or mon-
opoly which has been granted under governmental author-
ity. Therefore, under this exclusive franchise, the appel-
lee unions must treat all without discrimination in accord-
ance with the long established principles of common law.
Munn V. Illinois, 94 U. S. 113, 24 L. Ed. 77;
Stafford v. Wallace, 258 U. S. 495, 66 L. Ed. 735,
42 S. Ct. 397;
U. S. V. Ohio Oil Co., 234 U. S. 548, 58 L. Ed.
1459, 34 S. Ct. 956;
Slaughter House Cases, 16 Wall. 36, 21 L. Ed.
394, 425;
The York Manufacturing Co. v. The Illinois Cen-
tral Railroad, 3 Wall. 107, 112, 18 L. Ed. 170,
172, 70 U. S. 170;
Missouri Pac. Rwy. Co. v. Tucker, 230 U. S. 340,
33 S. Ct. 961, 57 L. Ed. 1507;
4 R. C. L. 565, 9 Am. Jur. 556.
Where unions have obtained monopolies by the closed
shop and the closed union, the State Courts have uni-
versally regulated those unions if the unions refused to
admit qualified persons to membership.
Wilson V. Newspaper & Mail Deliverers' Union,
123 N. J. Eq. 347, 197 Atl. 720;
Carroll v. Local No. 269, I. B. E. W., 133 N. J.
Eq. 144, 31 A. 2d 223;
—36—
Dorrington v. Manning (Pa. Super.), 4 A. 2d
886;
James V. Marinship, 25 Cal. 2d 721, 155 P. 2d 329,
160 A. L. R. 900;
Swab V. Motion Picture Machine Operators Local
No. 159 (Ore.), 109 P. 2d 600;
Restatement, Torts, Sees. 810, 918.
Thus it would appear under the authorities cited above
that where a union was acting under its statutory exclusive
bargaining agency and where it has obtained a closed shop
contract under the permission set forth in Section 8 of the
National Labor Relations Act, the union had the duty to
admit all persons to its union who were qualified w^orkers
and who were able to obtain contracts of employment. It
would also appear that the right of such persons to join
labor organizations has been granted under Section 7 of
the National Labor Relations Act; this is essential in
order that persons employed in an industry may take part
in the affairs of the union. But, assuming for the pur-
poses of argument that appellant has no right to join the
appellee unions, nevertheless, the appellees acting as the
exclusive bargaining agency for all first cameramen, in-
cluding appellant, should have made provision whereby
appellant could work without membership in the union,
which was required of them as his designated representa-
tive. Finally the appellee acting under their exclusive
franchise granted to them by the Congress at least owed
the duty to the appellant not to interfere with his working
as first cameraman.
—37—
III.
If, Acting Under Congressional Authority, Appellees
Have the Right to Prevent Appellant From En-
tering Into a Contract of Hire, Then Grave Ques-
tions of the Constitutionality of the National
Labor Relations Act Arise, a Federal Question.
The Fifth and Fourteenth Amendments to the Con-
stitution of the United States provide that no person shall
be deprived of life, liberty or property without due proc-
ess of law, and restrain respectively the State and Federal
Governments and their agencies from any violations of
the rights guaranteed by these Amendments to the Con-
stitution.
Appellant says that the National Labor Relations Act
cannot be construed to take away his right to enter into
a contract of hire, the only privilege left to him under
that Act (/. /. Case Co. v. N. L. R. B., 321 U. S. 2>?>2,
64 S. Ct. 576, 88 L. Ed. 762) ; that appellees, either as a
Congressionally clothed legislative body or functioning
under the Congressional grant of an exclusive franchise,
or as statutory agent, cannot take away this right of the
appellant. Furthermore, there is the Constitutional duty
of the Federal Courts to protect appellant in his right to
enter into a contract of hire under the implications of the
Race Restriction Cases, 334 U. S. 1, 68 S. Ct. 836.
Whether appellant be considered an alien, or having a
special status as one who has filed his declaration to be-
come a citizen, or as a white citizen, his rights are pro-
tected under the Fifth Amendment to the Constitution.
Yick Wo V. Hopkins, 118 U. S. 356, 6 S. Ct. 1064,
30 L. Ed. 220;
Truax v. Raich, 239 U. S. ?>2>, 36 S. Ct. 7, 60 L.
Ed. 131;
Buchanan v. Warlev, 245 U. S. 60, 38 S. Ct. 16,
62 L. Ed. 149.
—38—
It is immaterial to appellant whether it be determined
that his liberty or his property has been taken without due
process, or whether the Fifth Amendment be construed
as guaranteeing him a right to work, a right to enter into
a contract, or a right to earn a living. All he desires is
a protection from the unlawful interference of others of
the right to accept an offer of employment. The Supreme
Court and our State Courts have construed the Fifth and
Fourteenth Amendments by upholding this right of the
appellant.
Yick Wo V. Hopkins, supra;
Truax v. Raich, supra;
Mitchell V. Hitchman Coal and Coke Co. (C. C.
A. 4), 214 Fed. 685, 699 (reversed on other
grounds, 245 U. S. 229, 38 S. Ct. 65, 62 L. Ed.
260) ;
Adams v. Tanner, 244 U. S. 590, 2>7 S. Ct. 662,
61 L. Ed. 1336, L. R. A. 1917F 1163, Ann. Cas.
1917D 973;
Allgeyer v. Louisiana, 165 U. S. 578, 17 S. Ct.
427, 41 L. Ed. 832;
CPiicago B. & Q. R. Co. v. McGuire, 219 U. S. 549,
31 S. Ct. 259, 55 L. Ed. 328;
Booth V. Illinois, 184 U. S. 425, 22 S. Ct. 425, 46
L. Ed. 623.
See
West Coast Hotel Co. v. Parrish, 300 U. S. 379,
57 S. Ct. 578, 81 L. Ed. 703;
Bautista v. Jones, 25 Cal. 2d 746, 155 P. 2d 343;
Betts V. Easley, 161 Kans. 459, 169 P. 2d 831, 166
A. L. R. 342;
—39—
DeMille v. A. F. R. A., 31 Cal. 2d 139 (Cert, denied
by U. S. Supreme Court) ;
Slaughter House Cases, 16 Wall. 36, 21 L. Ed. 394,
425.
In the Yick Wo case, supra, the Court said:
"For, the very idea that one man may be compelled
to hold his life, or the means of living, or any ma-
terial right essential to the enjoyment of life, at the
mere will of another, seems to be intolerable in any
country where freedom prevails, as being the essence
of slavery itself."
Yick Wo V. Hopkins, 118 U. S. 356, 6 S. Ct. 1064,
30 L. Ed. 220, 226.
And so in Truax v. Raich, supra:
"It requires no argument to show that the right to
work for a living in the common occupations of the
community is of the very essence of the personal
freedom and opportunity that it was the purpose of
the Amendment to secure."
Truax v. Raich, 239 U. S. 2>i, 41, 36 S. Ct. 7, 60
L. Ed. 131, 135.
In Adams v. Tanner, supra, an initiative measure of
the State of Washington prohibited employment agencies
from charging any fees and it was held a taking without
due process. Opinion by Mr. Justice McReynolds:
" 'You take my house when you do take the prop
that doth sustain my house; you take my life when
you take the means whereby I live.' " (Shylock —
'Merchants of Venice' Act IV, Scene I, line 376.)
Adams v. Tanner, 244 U. S. 590, 593, ^7 S. Ct.
662, 61 L. Ed. 1336, 1342.
-40—
In Allgeyer v. Louisiana, supra, the Court said :
"The liberty mentioned in that amendment means,
not only the right of the citizen to be free from the
mere physical restraint of his person, as by incarcera-
tion, but the term is deemed to embrace the right of
the citizen to be free in the enjoyment of all his
faculties; to be free to use them in all lawful ways;
to live and work where he will; to earn his liveli-
hood by any lawful calling; to pursue any livelihood
or avocation, and for that purpose to enter into all
contracts which may be proper, necessary, and es-
sential to his carrying out to a successful conclusion
the purposes above mentioned."
Allgeyer v. Louisiana, 165 U. S. 578, 589, 17 S.
Ct 427, 41 L. Ed. 832, 835.
The Court said in Chicago B. & Q. R. Co. v. McGuire,
supra:
"Liberty implies the absence of arbitrary restraint,
not immunity from reasonable regulations and pro-
hibitions imposed in the interests of the community."
Chicago B. & O. R. Co. v. McGuire, 219 U. S.
549, 567, 31 S. Ct. 259, 55 L. Ed. 328, 338.
In West Coast Hotel Co. v. Parrish, supra, Mr. Chief
Justice Hughes said:
"The constitutional provision invoked is the due
process clause of the Fourteenth Amendment govern-
ing the States, as the due process clause invoked in
the Adkins Case governed Congress. In each case
the violation alleged by those attacking minimum
wage regulation for women is deprivation of free-
dom of contract. What is this freedom? The Con-
stitution does not speak of freedom of contract. It
speaks of liberty and prohibits the deprivation of
liberty without due process of law. In prohibiting
that deprivation the Constitution does not recognize
an absolute and uncontrollable liberty. Liberty in
each of its phases has its history and connotation.
But the liberty safeguard is liberty in a social or-
ganization which requires the protection of law
against the evils which menace the health, safety,
morals and welfare of the people. Liberty under the
Constitution is thus necessarily subject to the re-
straints of due process, and regulation which is rea-
sonable in relation to its subject and is adopted in the
interests of the community is due process."
West Coast Hotel Co. v. Parrish, 300 U. S. 379,
391, 57 S. Ct. 578, 81 L. Ed. 703, 708.
And in Bautista v. Jones, supra, the Court said :
"The right to work, either in employment or inde-
pendent business, is fundamental and, no doubt, en-
joys the protection of the personal liberty guarantee
of the Fourteenth Amendment to the federal Con-
stitution, as well as the more specific provisions of
our state Constitution. (Cal. Const., art. I, §§1, 13;
see Suckow v. Alderson, 182 Cal. 247 (187 P. 965);
Angelopulos v. Bottorff, 76 Cal. App. 621 (245 P.
447).) But this right, like others equally funda-
mental, is not absolute. It is safeguarded from legis-
lative action which discriminates against a person or
class of persons in respect of opportunities to obtain
work or enter into business (Yick Wo v. Hopkins,
118 U. S. 356 (6 S. Ct. 1064, 30 L. Ed. 220) ; Abe
V. Fish & Game Commission, 9 Cal. App. 2d 300 ( 49
P. 2d 608)) ; and it is also protected in some degree
—42—
against arbitrary action by private organizations, in-
cluding employers and labor unions. (James v. Mar-
inship Corp., supra.)"
Bantista v. Jones, 25 Cal. 2d 746,, 749. 155 P. 2d
343.
Mr. Justice Swayne in his dissenting opinion in the
Slaughter House cases, supra, has aptly expressed what
the plaintiff is attempting to say in this case:
''Life, liberty and property are forbidden to be
taken 'without due process of law,' and 'equal protec-
tion of the laws,' is guaranteed to all. Life is the
gift of God, and the right to preserve it is the most
sacred of the rights of man. Liberty is freedom from
all restraints but such as are justly imposed by law.
Beyond that line lies the domain of usurpation and
tyranny. Property is everything which has an ex-
changeable value, and the right of property includes
the power to dispose of it according to the will of the
owner. Labor is property, and as such merits pro-
tection. The right to make it available is next in im-
portance to the rights of life and liberty. It lies to
a large extent at the foundation of most other forms
of property, and of all solid individual and national
prosperity."
Slaughter House Cases, 16 Wall. 36, 21 L. Ed. 394
at page 425.
Therefore if, under the National Labor Relations Act
the appellees can take away appellant's right to enter into
a contract of employment there must be serious doubts as
to the constitutionalitv of this statute.
IV.
Appellant Claims Rights Under the National Labor
Relations Act, the Statutes, Treaties and Laws of
the United States; the District Court Has Juris-
diction to Determine Whether or Not Appellant
Has Any Rights Under Such Laws.
Under the preceding points of law the appellant has
relied on rights under Section 7 of the National Labor
Relations Act, on the duties of the appellee unions as ex-
clusive bargaining representatives under the same Act,
rights claimed under the Treaty with Poland and the
Charter of the United Nations, the common law rights
against arbitrary action by the appellee unions, holders
of an exclusive franchise under the Federal Government,
and the Constitution of the United States.
As stated earlier in this brief, the only question before
this Court is whether these claims of Federal rights are
substantial, and whether or not the appellant can ultimate-
ly establish rights in his favor under these laws of the
United States merely goes to the merits of the case and
is not involved in this appeal.
This principle was reiterated in the case of American
Federation of Labor v. Watson, 327 U. S. 582, 66 S. Ct.
761, 90 L. Ed. 873, where Mr. Justice Douglas stated:
"For it is the view of a majority of the Court that
jurisdiction is found in Sec. 24 (8) of the Judicial
Code, 28 U. S. C. Sec. 41 (8), 28 U. S. C. A. Sec.
41 (8), which grants the federal district courts juris-
diction of all 'suits and proceedings arising under
any law regulating commerce.' As we have said, the
bill alleges a conflict between the Florida law and the
National Labor Relations Act. The theory of the bill
is that labor unions, certified as collective bargaining
-44—
representatives of employees under that Act, are
.s^ranted as a matter of federal law the right to use
the closed-shop agreement or. alternatively, that the
right of collective bargaining granted by that Act
includes the right to bargain collectively for a closed
shop. Whether that claim is correct is a question
which goes to the merits. It is, however, a substan-
tial one. And since the right asserted is derived
from or recognized by a federal law regulating com-
merce, a majority of the Court conclude that a suit
to protect it against impairment by state action is a
suit 'arising under' a federal law 'regulating com-
merce.' Cf. Mulford V. Smith, 307 U. S. 38, 46, 59
S. Ct. 648, 651, 83 L. Ed. 1092; Peyton v. Raihvay
Express Agency, 316 U. S. 350, 62 S. Ct. 1171, 86
L. Ed. 1525; Parker v. Brozmi, 317 U. S. 341, 349,
62> S. Ct. 307, 312, 87 L. Ed. 315; Tunstall v. Broth-
erhood, 323 U. S. 210, 213, 65 S. Ct. 235, 237."
American Federation of Labor v. Watson, Z27
U. S. 582, at 591, 66 S. Ct. 761, at 765 ; 90 L. Ed.
873.
The only question is whether appellant relies on direct
rights guaranteed by Federal law, or merely indirect and
derivative rights.
Gidley v. First National Bank, 299 U. S. 109, 57
S. Ct. 96, 81 L. Ed. 70.
The silence of Congress as to judicial review which is
not found in the Act itself is
"not to be construed as a denial of authority to the
aggrieved person to seek appropriate relief in the
federal courts in the exercise of their general juris-
diction."
Stark V. Wickard, 321 U. S. 288, 309, 64 S. Ct.
559, 571, 88 L. Ed. 733.
V.
Appellant Is an Employee as Defined by the National
Labor Relations Act ; Has Been Employed as First
Cameraman and Has Had Offers of Employment.
Appellees Are Estopped From Claiming Appellant
Is Not an Employee.
Appellant was a first cameraman for three different
employers in the motion picture industry and thereby be-
came a member of the labor pool for first cameramen in
that industry. The National Labor Relations Board on
many occasions has recognized that, as alleged in the
complaint, employment in the motion picture industry is
often of an intermittent nature because persons are hired
only for the duration of a particular production. This
fact was recognized in the certification proceedings for
the lATSE, as referred to in paragraph IV of the com-
plaint on file herein and cited as 14 N. L. R. B. 224 [Tr.
6]. The N. L. R. B. did not require as a condition of
eligibihty that persons be employed on a particular date,
which is its usual practice, but ordered that persons work-
ing so many days in a year were eligible to vote. Further-
more, Section 2 of the Act provides that the term, "em-
ployee" shall include "any employee and shall not be
limited to the employees of a particular employer, * * *."
The National Labor Relations Board has also held that
free-lance artists are employed within the meaning of
the Act and their status is the same as that of employees
regularly employed.
K. M. O. X. Broadcasting Station, 10 N. L. R. B.
479.
This principle that where an employee has entered the
labor pool and been employed in an industry in which the
union is the exclusive bargaining agency certified for
-46—
many employers, particularly where employment is in-
termittent, is in accord with the principles established by
the Supreme Court that the National Labor Relations Act
contains a broad social program for the benefit of work-
ers as that term is understood, and rights guaranteed
thereunder are not limited to the technical relationship
of employer-employee, as construed by the law Courts.
Phelps Dodge Corp. v. N. L. R. B., 313 U. S. 177,
61 S. Ct. 845, 85 L. Ed. 1271, 133 A. L. R. 1217;
N. L. R. B. V. Hearst Publications, 322 U. S. Ill,
64 S. Ct. 851, 88 L. Ed. 1170.
In the Phelps Dodge Corp. case, supra, the employer
refused to give employment to certain persons because
they were members of the union. The order of the Na-
tional Labor Relations Board which required such per-
sons to be placed on the job was affirmed by the Supreme
Court. Mr. Justice Frankfurter, who delivered the
opinion, said:
"Discrimination against union labor in the hiring
of men is a dam to self organization at the source of
supply. The effect of such discrimination is not con-
fined to the actual denial of employment; it inevitably
operates against the whole idea of the legitimacy of
organization. * * *"
"Unlike mathematical symbols, the phrasing of
such social legislation as this seldom attains more
than approximate precision of definition."
Phelps Dodge Corp. v. N. L. R. B., 313 U. S. 177,
185, 61 S. Ct. 845, 848, 2>h L. Ed. 1271.
In A''. L. R. B. V. Hearst Publications, s-upra, the Su-
preme Court thrust aside the employer's contention that
newsboys were independent contractors and not within the
coverage of the Act, saying:
"Congress, on the one hand, was not thinking
solely of the immediate technical relation of employer
and employee. * * *"
"Congress was not seeking to solve the nationally
harassing problems with which the statute deals by
solutions only partially effective. It rather sought to
find a broad solution, one that would bring industrial
peace by substituting, so far as its power could reach,
the rights of workers to self-organization and col-
lective bargaining for the industrial strife which pre-
vails where these rights are not effectively established.
Yet only partial solutions would be provided if large
segments of workers about whose technical legal posi-
tion such local differences exist should be wholly
excluded from coverage by reason of such differ-
ences."
N. L. R. B. V. Hearst Publications, 322 U. S. Ill,
124, 125, 64 S. Ct. 851, 857, 858, 88 L. Ed.
1170.
If further analogy be needed to justify protection for
the appellant in this case, the broad program of the Na-
tional Labor Relations Act should not exclude from its
beneficient purposes that person who has one foot in the
door of employment and an offer of employment in hand.
Appellant certainly has been ever since arrival, a "])ros-
pective employee." Courts have held that in the absence
of any statute an employee who has struck and whose em-
ployer has attempted to terminate the relation of employ-
ment, is a "striking employee."
-48—
"We believe that in the absence of statute the re-
lationship of employer and employee is not completely
terminated by a strike, but that a new status arises.
The courts have coined a word to describe the situa-
tion and have called an employee on strike a 'striking
employee.' " (Emphasis ours.)
A^ L. R. B. V. Carlisle Lumber Co. (C. C. A. 9),
94 F. 2d 138, 144.
The appellees admit in their Motion to Dismiss that
their actions have prevented the plaintiff from being an
employee and yet, at the same time in the District Court,
attempted to avoid their responsibilities to the appellant by
saying that he is not an employee. The appellees are
"blowing hot and cold." Throughout our common law-
it has been one of the foundations of our philosophy of
justice that a person cannot take advantage of his own
wrong. This is also a rule of the Federal Court in con-
sidering the construction and application of a Congres-
sional statute.
'Tt is a principle of the widest application that
equity will not permit one to rely on his own wrongful
act, as against those affected by it but who have not
participated in it, to support his own asserted legal
title or to defeat a remedy which except for his mis-
conduct would not be available."
Deitrick v. Greaney, 309 U. S. 190, 196, 60 S. Ct.
480, 483, 84 L. Ed. 694.
Appellees are in the same position as a common carrier
who, when refusing to accept shipment of goods, claims
that the person offering the shipment is not a ''shipper"
because the carrier prevented him from placing his goods
on board.
Ohio Tank Car Co. v. Keith Ry. Equipment Co.
(CCA. 7), 148F. 2d4, 7.
Under the definition of "employee" in Section 2 of the
National Labor Relations Act and under the construction
of that word by the National Labor Relations Board and
the Supreme Court, appellant is an employee within the
meaning of the Act; if for any reason he is not, the ap-
pellees are not the ones to assert it.
Conclusion.
The immigrant comes to the United States with long
experience m a highly specialized field. The unions stand
at the gate of employment and say "he shall not pass."
Since the depths of the depression, when unions were weak
and disorganized, the unions have called upon the Govern-
ment of the United States of America to give them help
and aid in organizing the workmen throughout the nation,
and they received powerful grants from their Government.
The unions are strong. The immigrant is weak. The
immigrant has asked the Federal Courts to adjudicate his
claim that under the National Labor Relations Act, the
Treaty with Poland, the United Nations Charter, and the
Constitution of the United States, there reposes in him
some legal right against this bar to his earning a living
and becoming a worthy citizen of the United States.
Respectfully submitted,
Henry B. Ely,
Attorney for Appellant.
APPENDIX "A."
Constitution of the United States.
Article I.
Section 8.
"The Congress shall have Power * * *
"To regulate Commerce with foreign Nations, and
among the several States, and with the Indian Tribes;
Article VI.
"* * * and all Treaties made, or which shall be
made, under the Authority of the United States, shall be
the supreme Law of the Land; * * *"
Fifth Amendment.
"No person shall * * * j^g deprived of life, liberty,
or property, without due process of law; nor shall private
property be taken for public use, without just compensa-
tion."
Fourteenth Amendment.
"* * '■' nor shall any State deprive any person of life,
liberty, or property, without due process of law; * * *"
— 2—
APPENDIX "B."
National Labor Relations Act of 1935.
Section 1 (29 U. S. C A. 151):
'*. . . The inequality of bargaining power between
employees who do not possess full freedom of association
or actual liberty of contract, and employers who are or-
ganized in the corporate or other forms of ownership
association substantially burdens and affects the flow of
commerce, and tends to aggravate recurrent business de-
pressions, by depressing wage rates and the purchasing
power of wage earners in industry and by preventing the
stabilization of competitive wage rates and working con-
ditions within and between industries.
Experience has proved that protection by law of the
right of employees to organize and bargain collectively
safeguards commerce from injury, impairment, or inter-
ruption, and promotes the flow of commerce by removing
certain recognized sources of industrial strife and unrest,
by encouraging practices fundamental to the friendly ad-
justment of industrial disputes arising out of differences
as to wages, hours, or other working conditions, and by
restoring equality of bargaining power between employers
and employees.
It is declared to be the policy of the United States to
eliminate the causes of certain substantial obstructions to
the free flow of commerce and to mitigate and eliminate
these obstructions when they have occurred by encourag-
ing the practice and procedure of collective bargaining
and by protecting the exercise by workers of full freedom
of association, self -organization, and designation of rep-
resentatives of their own choosing, for the purpose of
negotiating the terms and conditions of their employment
or other mutual aid or protection."
— 3—
Section 2 (3) (29 U. S. C. A. 152) :
"The term 'employee' shall include any employee, and
shall not be limited to the employees of a particular em-
ployer, unless the chapter explicitly states otherwise, . . ."
Section 7 (29 U. S. C. A. 157):
"Employees shall have the right to self-organization, to
form, join, or assist labor organizations, to bargain col-
lectively through representatives of their own choosing,
and to engage in concerted activities, for the purpose of
collective bargaining or other mutual aid or protection."
Section 8 (3) (29 U. S. C. A. 158) :
". . . Provided, That nothing in sections 151-166 of
this title or in any other statute of the United States, shall
preclude an employer from making an agreement with a
labor organization (not established, maintained, or assist-
ed by any action defined in sections 151-166 of this title
as an unfair labor practice) to require as a condition of
employment membership therein, if such labor organiza-
tion is the representative of the employees as provided in
section 159 (a) of this title, in the appropriate collective
bargaining unit covered by such agreement when made."
Section 9 (a) (29 U. S. C. A. 159):
"(a) Representatives designated or selected for the
purposes of collective bargaining by the majority of the
employees in a unit appropriate for such purposes, shall
be the exclusive representatives of all the employees in
such unit for the purposes of collective bargaining in
respect to rates of pay, wages, hours of employment, or
other conditions of employment: . . ."
— 4—
APPENDIX "C."
Treaty Between the United States and Poland of
Friendship, Commerce, Consular Rights; Pro-
claimed July 10, 1933; 48 Stat. L. 1507.
The United States of America and the RepubHc of
Poland, desirous of strengthening the bond of peace which
happily prevails between them, by arrangements designed
to promote friendly intercourse between their respective
territories through provisions responsive to the spiritual,
cultural, economic and commercial aspirations of the
peoples thereof, have resolved to conclude a Treaty of
Friendship, Commerce and Consular Rights and for that
purpose have appointed as their plenipotentiaries:
The President of the United States of America, Henry
L. Stimson, Secretary of State of the United States of
America, and
The President of the Republic of Poland, Tytus Fili-
powicz. Ambassador Extraordinary and Plenipotentiary
of Poland in Washington,
Who, having communicated to each other their full
powers found to be in due form, have agreed upon the
following articles:
Article I. The nationals of each of the High Con-
tracting Parties shall be permitted to enter, travel and
reside in the territories of the other ; to exercise liberty of
conscience and freedom of worship; to engage in profes-
sional, scientific, religious, philanthropic, manufacturing
and commercial work of every kind; to carry on every
form of commercial activity which is not forbidden by the
local law; to own, erect, or lease and occupy appropriate
buildings and to lease lands for residential, scientific, re-
ligious, philanthropic, manufacturing, commercial and
mortuary purposes; to employ agents of their choice; and
generally the said nationals shall be permitted, upon sub-
mitting themselves to all local laws and regulations duly
established, to enjoy all of the foregoing privileges and to
do anything incidental to or necessary for the enjoyment
of those privileges, upon the same terms as nationals of
the State of residence, except as otherwise provided by
laws of either High Contracting Party in force at the
time of the signature of this Treaty. In so far as the laws
of either High Contracting Party in force at the time of
the signature of this Treaty do not permit nationals of
the other party to enjoy any of the foregoing privileges
upon the same terms as the nationals of the State of resi-
dence, they shall enjoy, on condition of reciprocity, as
favorable treatment as nationals of the most favored
nation.
The nationals of either High Contracting Party within
the territories of the other shall not be subjected to the
payment of any internal charges or taxes other or higher
than those that are exacted of and paid by its nationals.
The nationals of each High Contracting Party shall
enjoy freedom of access to the courts of justice of the
other on conforming to the local laws, as well for the
prosecution as for the defense of their rights, in all de-
grees of jurisdiction established by law.
The nationals of each High Contracting Party shall
receive within the territories of the other, upon submitting
to conditions imposed upon its nationals, the most constant
protection and security for their persons and property,
and shall enjoy in this respect that degree of protection
that is required by international law. Their property shall
not be taken without due process of law and without pay-
ment of just compensation.
Nothing contained in this Treaty shall be construed to
affect existing statutes of either of the High Contracting
Parties in relation to emigration or to immigration or
the right of either of the High Contracting Parties to
enact such statutes, provided, however, that nothing in this
paragraph shall prevent the nationals of either High Con-
tracting Party from entering, traveling and residing in
the territories of the other party in order to carry on
international trade or to engage in any commercial activi-
ty related to or connected with the conduct of international
trade on the same terms as nationals of the most favored
nation.
Nothing contained in this Treaty is to be considered as
interfering with the right of either party to enact or en-
force statutes concerning the protection of national labor.
*********
Article XH. The nationals of either High Contracting
Party shall enjoy within the territories of the other, re-
ciprocally and upon compliance with the conditions there
imposed, such rights and privileges as have been or may
hereafter be accorded the nationals of any other State
— 7—
with respect to the org-anization of and participation in
Hmited Hability and other corporations and associations,
for pecuniary profit or otherwise, including the rights of
promotion, incorporation, purchase and ownership and
sale of shares and the holding of executive or official posi-
tions therein. In the exercise of the foregoing rights and
with respect to the regulation or procedure concerning
the organization or conduct of such corporations or asso-
ciations, such nationals shall be subjected to no conditions
less favorable than those which have been or may here-
after be imposed upon the nationals of the most favored
nation. The rights of any of such corporations or asso-
ciations as may be organized or controlled or participated
in by the nationals of either High Contracting Party
within the territories of the other to exercise any of their
functions therein, shall be governed by the laws and regu-
lations, National, State or Provincial, which are in force
or may hereafter be established within the territories of
the party wherein they propose to engage in business.
APPENDIX "D."
Charter of the United Nations;
59 Stat. L. 1046.
Preamble.
We the peoples of the United Nations determined to
save succeeding generations from the scourge of war,
which twice in our Hfetime has brought untold sorrow to
mankind; and
to reaffirm faith in fundamental human rights, in the
dignity and worth of the human person, in the equal rights
of men and women and of nations large and small; and
to establish conditions under which justice and respect
for the obligations arising from treaties and other sources
of international law can be maintained; and
to promote social progress and better standards of life
in larger freedom; and for these ends to practice tolerance
and live together in peace with one another as good
neighbors; and
to unite our strength to maintain international peace and
security; and
to ensure, by the acceptance of principles and the in-
stitution of methods, that armed force shall not be used,
save in the common interest; and
to employ international machinery for the promotion of
the economic and social advancement of all peoples; have
resolved to combined our efforts to accomplish these aims.
Accordingly, our respective Governments, through rep-
resentatives assembled in the city of San Francisco, who
have exhibited their full powers found to be in good and
due form, have agreed to the present Charter of the United
Nations and do hereby establish an international organiza-
tion to be known as the United Nations.
Chapter I. Purposes and Principles.
Article 1.
The Purposes of the United Nations are:
1. To maintain international peace and security, and
to that end: to take effective collective measures for the
prevention and removal of threats to the peace, and for
the suppression of acts of agression or other breaches of
the peace, and to bring about by peaceful means, and in
conformity with the principles of justice and international
law, adjustment or settlement of international disputes or
situations which might lead to a breach of the peace;
2. To develop friendly relations among nations based
on respect for the principle of equal rights and self-
determination of peoples, and to take other appropriate
measures to strengthen universal peace;
3. To achieve international cooperation in solving in-
ternational problems of an economic, social, cultural, or
humanitarian character, and in promoting and encourag-
ing respect for human rights and for fundamental free-
doms for all without distinction as to race, sex, language,
or religion; and
4. To be a center for harmonizing the actions of na-
tions in the attainment of these common ends.
Article 2.
The Organization and its Members, in pursuit of the
purposes stated in Article 1, shall act in accordance with
the following Principles:
1. The Organization is based on the principles of the
sovereign equality of all its members.
—10—
2. All Members, in order to ensure to all of them the
rights and benefits resulting from membership, shall ful-
fill in good faith the obligations assumed by them in ac-
cordance with the present Charter.
3. All Members shall settle their international disputes
by peaceful means in such a manner that international
peace and security, and justice are not endangered.
4. All Members shall refrain in their international
relations from the threat or use of force against the terri-
torial integrity or political independence of any state, or
in any other manner inconsistent with the Purposes of the
United Nations.
5. All Members shall give the United Nations every
assistance in any action it takes in accordance with the
present Charter, and shall refrain from giving assistance
to any state against which the United Nations is taking
preventive or enforcement action.
6. The Organization shall ensure that states which
are not Members of the United Nations act in accordance
with these Principles so far as may be necessary for the
maintenance of international peace and security.
7. Nothing contained in the present Charter shall
authorize the United Nations to intervene in matters which
are essentially within the domestic jurisdiction of any
state or shall require the Members to submit such matters
to settlement under the present Charter; but this principle
shall not prejudice the application of enforcement measures
under Chapter VII.
—11—
Article 55.
With a view to the creation of conditions of stabihty
and well-being which are necessary for peaceful and
friendly relations among nations based on respect for the
principle of equal rights and self-determination of peoples,
the United Nations shall promote:
a. Higher standards of living, full employment, and
conditions of economic and social progress and develop-
ment;
b. Solutions of international economic, social, health,
and related problems; and international cultural and edu-
cational cooperation; and
c. Universal respect for, and observance of, human
rights and fundamental freedoms for all without distinc-
tion as to race, sex, language, or religion.
Article 56.
All Members pledge themselves to take joint and sepa-
rate action in cooperation with the Organization for the
achievement of the purposes set forth in Article 55.
—12—
APPENDIX "E."
(Old) 28 U. S. C. A. 41 (1):
"First. Of all suits of a civil nature, at common law
or m equity, brought by the United States, or by any
officer thereof authorized by law to sue, or between citi-
zens of the same State claiming lands under grants from
different States; or, where the matter in controversy ex-
ceeds, exclusive of interest and costs, the sum or value
of $3,000, and (a) arises under the Constitution or laws
of the United States, or treaties made, or which shall be
made, under their authority, . . ."
(New) 28 U. S. C 1331:
"The district courts shall have original jurisdiction of
all civil actions wherein the matter in controversy exceeds
the sum or value of $3,000, exclusive of interest and costs,
and arises under the Constitution, laws or treaties of the
United States."
(Old) 28 U. S. C. A. 41 (8) :
"Of all suits and proceedings arising under any law
regulating commerce."
(New) 28 U. S. C. 1337:
"The district courts shall have original jurisdiction of
any civil action or proceeding arising under any Act of
Congress regulating commerce or protecting trade and
commerce against restraints and monopolies."
(Old) 28 U. S. C. A. 41 (12):
"Of all suits authorized by law to be brought by any
person for the recovery of damages on account of any
injury to his person or property, or of the deprivation of
—13—
any right or privilege of a citizen of the United States, by
any act done in furtherance of any conspiracy mentioned
in section 47 of Title 8."
(Old) 28 U. S. C. A. 41 (13):
"Of all suits authorized by law to be brought against
any person who, having knowledge that any of the wrongs
mentioned in section 47 of Title 8, are about to be done,
and, having power to prevent or aid in preventing the
same, neglects or refuses so to do, to recover damages for
any such wrongful act."
(Old) 28 U. S. C. A. 41 (14):
"Of all suits at law or in equity authorized by law to be
brought by any person to redress the deprivation, under
color of any law, statute, ordinance, regulation, custom,
or usage, of any State, of any right, privilege, or immu-
nity, secured by the Constitution of the United States, or
of any right secured by any law of the United States pro-
viding for equal rights of citizens of the United States,
or of all persons within the jurisdiction of the United
States."
(New) 28 U. S. C. 1343:
"The district courts shall have original jurisdiction of
any civil action authorized by law to be commenced by any
person :
(1) To recover damages for injury to his person or
property, or because of the deprivation of any right or
privilege of a citizen of the United States, by any act
done in furtherance of any conspiracy mentioned in sec-
tion 47 of Title 8;
—14—
(2) To recover damages from any person who fails
to prevent or to aid in preventing any wrongs mentioned
in section 47 of Title 8 which he had knowledge were
about to occur and power to prevent;
(3) To redress the deprivation, under color of any
State law, statute, ordinance, regulation, custom or usage,
of any right, privilege or immunity secured by the Con-
stitution of the United States or by any Act of Congress
providing for equal rights of citizens or of all persons
within the jurisdiction of the United States."
(Old) 28 U. S. C A. 41 (17):
"Of all suits brought by any alien for a tort only, in
violation of the laws of nations or of a treaty of the United
States."
(New) 28 U. S. C. 1350:
"The district courts shall have original jurisdiction of
any civil action by an alien for a tort only, committed in
violation of the law of nations or a treaty of the United
States."
(Old) 28 U. S. C. A. 41 (23):
"Of all suits and proceedings arising under any law to
protect trade and commerce against restraints and monop-
olies."
(New) 28 U. S. C. 1337:
(See above )»
—15—
APPENDIX "F."
Sections of U. S. C. A.
8 U. S. C. A. 41 :
"All persons within the jurisdiction of the United
States shall have the same right in every State and Terri-
tory to make and enforce contracts, to sue, be parties,
give evidence, and to the full and equal benefit of all laws
and proceedings for the security of persons and property
as is enjoyed by white citizens, and shall be subject to like
punishment, pains, penalties, taxes, licenses, and exactions
of every kind, and to no other."
8 U. S. C. A. 43 :
"Every person who, under color of any statute, ordi-
nance, regulation, custom, or usage, of any State or Terri-
tory, subjects, or causes to be subjected, any citizen of
the United States or other person within the jurisdiction
thereof to the deprivation of any rights, privileges, or
immunities secured by the Constitution and laws, shall
be liable to the party injured in any action at law, suit in
equity, or other proper proceeding for redress."
8 U. S. C. A. 47 (3):
"If two or more persons in any State or Territory con-
spire or go in disguise on the highway or on the premises
of another, for the purpose of depriving, either directly
or indirectly, any person or class of persons of the equal
protection of the laws, or of equal privileges and immu-
nities under the laws; * * * j^^ ^my case of conspiracy
set forth in this section, if one or more persons engaged
therein do, or cause to be done, any act in furtherance of
the object of such conspiracy, whereby another is injured
in his person or property, or deprived of having and exer-
cising any right or privilege of a citizen of the United
States, the party so injured or deprived may have an ac-
tion for the recovery of damages, occasioned by such in-
jury or denrivation, against any one or more of the con-
spirators."
—16—
APPENDIX "G."
Sections of Labor Code, State of California.
§921. Promise as to joining, remaining in, or with-
draiving from labor organisations. Relief:
[Promises contrary to public policy.] Every promise
made after August 21, 1933', between any employee or
prospective employee and his employer, prospective em-
ployer or any other person is contrary to public policy if
either party thereto promises any of the following:
(a) To join or to remain a member of a labor organiza-
tion or to join or remain a member of an employer organ-
ization,
(b) Not to join or not to remain a member of a labor
organization or of an employer organization.
(c) To withdraw from an employment relation in the
event that he joins or remains a member of a labor or-
ganization or of an employer organization.
[Promise no basis for relief.] Such promise shall not
afford any basis for the granting of legal or equitable re-
lief by any court against a party to such promise, or
against any other persons who advise, urge, or induce,
without fraud or violence or threat thereof, either party
thereto to act in disregard of such promise.
§922. Coercing agreement not to join labor organisa-
tion. Misdemeanor:
Any person or agent or officer thereof who coerces or
compels any person to enter into an agreement, written
or verbal, not to join or become a member of any labor
organization, as a condition of securing employment or
continuing in the employment of any such person is guilty
of a misdemeanor.
—17—
§923. Public policy as to labor organisations.
In the interpretation and application of this chapter,
the pubHc policy of this State is declared as follows:
Negotiation of terms and conditions of labor should
result from voluntary agreement between employer and
employees. Governmental authority has permitted and
encouraged employers to organize in the corporate and
other forms of capital control. In dealing with such em-
ployers, the individual unorganized worker is helpless to
exercise actual liberty of contract and to protect his free-
dom of labor, and thereby to obtain acceptable terms and
conditions of employment. Therefore it is necessary that
the individual workman have full freedom of association,
self-organization, and designation of representatives of
his own choosing, to negotiate the terms and conditions of
his employment, and that he shall be free from the inter-
ference, restraint, or coercion of employers of labor, or
their agents, in the designation of such representatives or
in self-organization or in other concerted activities for the
purpose of collective bargaining or other mutual aid or
protection.
—18—
APPENDIX "H."
Section of Labor Management Relations Act, 1947.
Section 301 (c) :
For the purposes of actions and proceedings by or
against labor organizations in the district courts of the
United States, district courts shall be deemed to have
jurisdiction of a labor organization (1) in the district in
which such organization maintains its principal office, or
(2) in any district in which its duly authorized officers or
agents are engaged in representing or acting for employee
members.
APPENDIX "I."
15 U. S. C. A. 15.
Any person who shall be injured in his business or
property by reason of anything forbidden in the anti-
trust laws may sue therefor in any district court of the
United States in the district in which the defendant re-
sides or is found or has an agent, without respect to the
amount in controversy, and shall recover three-fold the
damages by him sustained, and the cost of suit, including
a reasonable attorney's fee. Oct. 15, 1914, c. 323 §4, 38
Stat. 731.
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry Local 659, Etc., et al.,
Appellees.
Answering Brief of Appellees International Photogra-
phers of the Motion Picture Industry Local 659,
Etc., and Herbert Aller.
DEC2b194S
Bodkin, Breslin & Luddy, r?» fpf
Henry G. Bodkin,
George M. Breslin,
Michael G. Luddy,
1225 Citizens National Bank Building, Los Angeles 13,
Attorneys for Appellees Defendant Local and Aller.
Parker & Company, Law Printers, Los Angeles. Phone TR. 5206.
TOPICAL INDEX.
PAGE
Additional statement of the case 1
I.
The rights, privileges, and immunities granted aliens by treaties
to which the United States is a high contracting party will be
protected by the United States courts only against action by
states or political divisions thereof : in the instant action,
appellant is not deprived of any right by any action of the
State of California or its political subdivisions 5
II.
A case does not arise "under the Constitution or laws of the
United States" unless it involves a real and substantial dis-
pute respecting the validity, construction, or effect of the
Constitution or such laws, upon the determination of which
the result depends 7
III.
District Court had no jurisdiction herein by virtue of any of
the provisions of the Anti-Trust Laws 9
IV.
Statutes of the United States "regulating commerce" do not
vest jurisdiction in the District Court over the instant action.. 14
V.
Neither National Labor Relations Act nor Labor Management
Relations Act, 1947, vests jurisdiction in the District Court
over subject matter of action or parties thereto 17
VI.
Jurisdiction is not vested in the District Court over the instant
action under the Fifth or the Fourteenth Amendments to the
Constitution of the United States, nor by Section 41. Title 28,
U. S. C. A., or any subsection thereof. Section 43, Title 8.
U. S. C. A.. Section 47(3), Title 8, U. S. C. A., Section 48,
Title 8, U. S. C. A., nor by Civil Rights statutes 23
PAGE
VII.
No provision of the California Labor Code can vest jurisdiction
in the District Court 30
VIII.
Requirement in constitution of the Alliance that members be
citizens of the United States or of Canada, or of any other
territory in which the Alliance exercises jurisdiction, is rea-
sonable and valid and violates no right of appellant protected
by any provision of the Constitution or laws of the United
States ; aliens may lawfully be excluded from privileges ex-
tended by law to citizens 31
IX.
Since defendant Local has never been nor professed to be bar-
gaining representative of appellant and has never undertaken
to bargain for him, Tunstall case doctrine has no application.. 35
X.
Wallace case has no application because defendant Local is not
a company-dominated labor organization and appellant was
not employed as a first cameraman by any employer, party to
the closed-shop contracts, at the time such contracts were
executed 43
Conclusion 49
Index to Appendices:
Appendix A. Excerpts from Love v. Chandler, 124 F. 2d
785 App. p. 1
Appendix B. Excerpts from Steele v. Louisville, etc., 323
U. S. 192, 89 L. Ed. 173 App. p. 4
111.
TABLE OF AUTHORITIES CITED
Cases page
Allen Bradley Co. v. Local Union No. 3, 325 U. S. 797, 89 L.
Ed. 1939 9, 10
Amazon Mills Co. v. Textile Workers Union, 167 F. 2d 183....
17, 22, 48
Asakura v. Seattle, 265 U. S. ?>2>2, 68 L. Ed. 1041 5
Betts V. Easley, 161 Kan. 459, 169 P. 2d 831, 166 A. L. R. 342.. 35
Brents v. Stone, et al., 60 Fed. Supp. 82 23, 27, 29
Brotherhood of Locomotive Firemen, etc. v. Tunstall, 163 F.
2d 289 35
California Oil and Gas Co. v. Miller, 96 Fed. 12 23, 25
Civil Rights Cases, 109 U. S. 3, 27 L. Ed. 836 23, 24
Clarke v. Deckebach, 274 U. S. 392, 71 L. Ed. 1115 31
Corrigan v. Buckley, 271 U. S. 323, 70 L. Ed. 969 23, 24
Corsi case, 326 U. S. 88, 89 L. Ed. 2072 13
Delaware L. & W. R. Co. v. Slocum, 56 Fed. Supp. 634 14
Donnelly Garment Co. v. International Ladies' Garment Work-
ers' Union, 99 F. 2d 309 17, 18, 48
Emmons v. Smitt, et al., 58 Fed. Supp. 869 23, 27, 29
Fur Workers Union, etc. v. Fur Workers Union, 105 F. 2d
1 ; aff'd 308 U. S. 522, 84 L. Ed. 443 17, 19
Gerry of California v. Superior Court, 32 A. C. 141, 194 P. 2d
689 17, 22, 48
Graham v. Southern Ry. Co., 74 Fed. Supp. 663 35
Gully V. First National Bank, 299 U. S. 109, 81 L. Ed. 70. 7
Haywood v. United States, 268 Fed. 795 2?,, 27, 29
Heim v. McCall, 239 U. S. 173, 60 L. Ed. 206 31
Hunt v. Crumboch, 325 U. S. 821, 89 L. Ed. 1954 9, 11
James case, 25 Cal. 2d 721 12, 13, 42
Love V. Chandler, 124 F. 2d 785 2Z, 25, 26, 29
IV.
PAGE
Love V. United States, 108 F. 2d 43; cert. den. 309 U. S. 673,
84 L. Ed. 1018 23, 26, 29
Mitchell V. Greenough, 100 F. 2d 184 ; cert. den. 306 U. S. 659,
83 L. Ed. 1056 23, 26, 29
Oyama v. State of California, 332 U. S. 633, 68 S. Ct. 269 6
Patsone v. Pennsylvania, 32 U. S. 183, 58 L. Ed. 539 31
Schatte, et al. v. International Alliance, etc., et al., 70 Fed. Supp.
1008; aff'd 165 F. 2d 216; cert. den. 68 S. Ct. 1018, 92 L.
Ed. 985 7, 8, 14, 16, 23, 29, 30
Shafer v. Registered Pharmacists Union, 16 Cal. 2d 379 30
Shulthis V. McDougal, 225 U. S. 561, 56 L. Ed. 1205 7
Simpson v. Geary. 204 Fed. 507 23, 25, 29
Smith Metropolitan Market Co. v. Lyons, 16 Cal. 2d 389 30
Steele v. Louisville and N. R. Co.. 323 U. S. 192, 65 S. Ct.
226, 89 L. Ed. 173 35, 37. 38, 39
Terrace v. Thompson, 263 U. S. 197. 68 L. Ed. 255 31
Trailmobile Co. v. Whirls, 331 U. S. 40, 67 S. Ct. 982. 92 L.
Ed. 1328 47
Tunstall v. Brotherhood of Locomotive Firemen, 323 U. S.
210, 65 S. Ct. 235, 89 L. Ed. 187 35, 36, 37, 38, 39
United States v. Harris, 106 U. S. 629, 27 L. Ed. 290 23, 25
United States v. Hutcheson, 312 U. S. 219, 85 L. Ed. 788 9, 11
United States v. Moore, 129 Fed. 630 23, 27, 29
Virginia v. Rives, 100 U. S. 313. 25 L. Ed. 667 23, 25
Wallace Corp. v. National Labor Relations Board, 323 U. S.
248. 65 S. Ct. 238, 89 L. Ed. 216 42. 45, 47
Williams case, 27 Cal. 2d 586 12
Miscellaneous
Tenth Annual Report, National Labor Relations Board, pp.
57-58 43
Twelfth Annual Report, National Labor Relations Board, pp.
49-50 ...,.,...,..i , ...,.,A, L. 43
V.
Statutes page
Business and Professions Code, Sec. 118 33
Business and Professions Code. Sec. 2736(b) 33
Business and Professions Code, Sec. 2743 33
Business and Professions Code, Sec. 2744 33
Business and Professions Code, Sec. 4096 34
Fish and Game Code, Sec. 427 33
Fish and Game Code. Sec. 428 33
Labor Code, State of CaUfornia, Sees. 921-925 30
Labor Code, Sec. 1850 34
Labor Code, Sec. 1941 34
Labor Code, Sec. 1943 34
Labor Management Relations Act. 1947 (29 U. S. C. A., Sees.
141-197) 17
Labor Management Relations Act, 1947, Sec. 2 39
Labor Management Relations Act. 1947, Sec. 8(3) 17, 22, 45
Labor Management Relations Act. 1947. Sec. 9(a) 40
Labor Management Relations Act, 1947, Sec. 102 17, 21
Labor Management Relations Act, 1947, Sec. 301 21
Labor Management Relations Act, 1947, Sec. 301(a) 17, 19
Labor Management Relations x\ct, 1947, Sec. 302 21
Labor Management Relations Act, 1947, Sec. 303 17, 20, 21
National Labor Relations Act (29 U. S. C. A., Sees. 151-166).... 17
National Labor Relations Act, Sec. 2 39
National Labor Relations Act. Sec. 10(a) (29 U. S. C. A., Sec.
160(a)) 18
National Labor Relations Act, Sec. 10(e), (1) 17, 19
National Labor Relations Act, Sec. 96(a) 40
Railway Labor Act (40 Opinion Atty. Gen. — No. 39, Dec. 29,
1942) 39
United States Code .\nontated. Title 8. Sec. 47 26
United States Code Annotated, Title 8, Sec. 71 .., 32
VI.
PAGE
United States Code Annotated, Title 8, Sec. 78 32
United States Code Annotated, Title 8, Sec. 83 32
United States Code Annotated, Title 15, Sec. 15 9
United States Code Annotated, Title 15. Sec. 17 9, 11
United States Code Annotated, Title 28, Sec. 41(8) 14
United States Code Annotated, Title 28, Sec. 41(23) 9
United States Code Annotated, Title 30, Sec. 181 32
United States Code Annotated, Title 43, Sec. 16 32
United States Code Annotated, Title 47, Sec. 310 31
United States Code Annotated, Title 48, Sec. 189, Subds. (e)
and (h) 32
United States Code Annotated, Title 48, Sec. 302(a) 33
United States Consttitution, Fifth Amendment 6, 24, 27
United States Constitution, Fourteenth Amendment....6, 24, 25, 27
Welfare and Institutions Code, Sec. 2160(b) 33
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry Local 659, Etc., et al.,
Appellees.
Answering Brief of Appellees International Photogra-
phers of the Motion Picture Industry Local 659,
Etc., and Herbert Aller.
Additional Statement of the Case.
Appellee International Photographers of the Motion
Picture Industry Local 659, etc., hereinafter referred to
as Defendant Local, is a labor organization whose mem-
bers, including first cameramen, are employed in the Hol-
lywood motion picture studios; appellee Aller is its busi-
ness representative; appellant, appellee Aller, and all mem-
bers of Defendant Local are residents and citizens of the
State of California. Diversity of citizenship is not as-
serted; its absence affirniatively appears.
Appellant seeks to recover damages for past and pros-
pective loss of earnings, humiliation, worry, frustration,
and loss of prestige, all resulting, he claims, from the re-
fusal of Defendant Local to admit him into membership.
Defendant Local, for sexeral years last past, has had, and
now has, a closed-shop contract with the Hollywood
— 2—
Studios, expiring, according to the complaint, on Decem-
ber 31, 1948. The District Court granted motions in-
terposed by the appellees to dismiss and entered a judg-
ment of dismissal for lack of jurisdiction [28-29*].
In Paragraph XI of his complaint [11], appellant al-
leges that ever since January 1, 1942, Defendant Local has
refused to admit him to membership and, with the excep-
tions thereafter noted, has refused to permit him to work
as a first cameraman for any employer engaged in the pro-
duction of motion pictures within the State of California.
He alleges in Paragraph XVI of the complaint [13] that
ever since January 1, 1942, the Constitution of appellee
International Alliance, etc., the parent organization of De-
fendant Local, has provided that "no person shall be
eligible to membership in said Alliance who is not a citi-
zen of the United States or Canada, or of any other ter-
ritory in which The Alliance exercises jurisdiction," and
that Defendant Local and its members consider said con-
stitutional provision to be binding upon them and have,
ever since January 1, 1942, until July 11, 1947, when
appellant became a citizen of the United States, treated
such constitutional provision as one of the grounds for re-
fusing to admit appellant to membership. It is further al-
leged in Paragraph XVII [13] that Defendant Local and
its members have never advised appellant of any reason for
the denial of membership, except that same was ''contrary
to their Constitution or that employment as first camera-
man was desired for the members of" Defendant Local.
In Paragraph XIX of his complaint [14] appellant al-
leges that the defendant "permitted" him to be employed
*P'igures appearing in brackets refer, unless otherwise noted, to
pages of Transcript of Record.
— 3—
on three productions of motion pictures, one in 1945,
another in 1946, and another in 1947 , under certain terms
and conditions laid down by Defendant Local.
With respect to the closed-shop contracts existing be-
tween Defendant Local and the Hollywood Studios, appel-
lant alleges in Paragraph VII of his complaint [7-8] as
follows :
"Local 659 is a labor organization having as one
of its purposes the collective bargaining with employ-
ers upon negotiation of wages, hours and working
conditions for its members ; that officers and agents of
Local 659 are engaged in representing and act for
employee members within the above entitled district,
and Local 659 maintains its principal office therein;
on December 10, 1942, and all times thereafter Local
659 was a chartered local union of the lATSE; ever
since December 10, 1942, Local 659 has been desig-
nated by a majority of first cameramen in said State
of California as their exclusive bargaining agency on
wages, hours and working conditions and, ever since
the said date, Local 659 has represented first camera-
men in negotiations with all employers engaged in the
production of motion pictures within said State as
aforesaid; that Local 659 is not established, main-
tained or dominated by any employer; ever since De-
cember 10, 1942, there has been no controversy be-
tween any employer and Local 659 as to whether or
not Local 659 was the exclusive bargaining agency
for first cameramen on wages, hours and working
conditions of first cameramen; at all times since that
date Local 659 has acted as the exclusive bargaining
agency on wages, hours and working conditions of
first cameramen; pursuant to, by virtue of and un-
der the color of the authority granted to it by the Na-
tional Labor Relations Act, Sections 921-923 of the
— 4—
Labor Code of the State of California, and the law
of the State of California, Local 659, on or about
January 1, 1943, entered into contracts with all em-
ployers engaged in the production of motion pictures
as aforesaid within the State of California, requir-
ing as a condition of employment that all first camera-
men be and remain members in good standing of
Local 659, a contract with such provision being com-
monly known as a closed shop contract; closed shop
contracts for first cameramen between Local 659 and
all employers engaged in the motion picture industry
within said State have remained in full force and ef-
fect from on or about January 1, 1943, to and in-
cluding the date of the filing of this complaint; the
last agreement entered into by and between lATSE,
Local 659, and all employers engaged in the produc-
tion of motion pictures in said State was executed
in writing as of January 1, 1946, for a term ending
December 31, 1948, and provides that Local 659 shall
represent all first cameramen for the purpose of col-
lective bargaining and that employers engaged in the
production of motion pictures will employ only first
cameramen who are members in good standing of
Local 659, and that Local 659 will furnish competent
men to perform the work and render the services re-
quired by the employer of first cameramen."
It will be observed from the foregoing that appellant
was not employed as a first cameraman, or in any other
capacity, by any of the Hollywood Studios with which De-
fendant Local has or has had closed-shop contracts at the
time such closed-shop contracts were executed. So far as
the particular work which appellant was "permitted" by
Defendant Local to do in 1945, in 1946, and in 1947, it is
obvious that these three assignments were executed by ap-
pellant as a permittee of Defendant Local.
I.
The Rights, Privileges, and Immunities Granted Aliens
by Treaties to Which the United States Is a High
Contracting Party Will Be Protected by the
United States Courts Only Against Action by
States or Political Divisions Thereof; in the In-
stant Action, Appellant Is Not Deprived of Any
Right by Any Action of the State of California
or Its Political Subdivisions.
For the purpose of our discussion on this point, we will
assume arguendo that the Treaty with Poland and the
Charter of the United Nations each contains a provision
specifically providing that citizens of Poland residing in
the United States shall have the right to work as first
cameramen in motion picture studios located in the State
of California. Such construction of these treaties, how-
ever, will avail appellant nothing and does not vest juris-
diction in the District Court in the instant action. Treaties
to which the United States is a party, it is true, are part
of the supreme law of the land, but only when official ac-
tion by a state or a political subdivision thereof, by en-
actment of state legislation or city ordinance, deprives an
alien of a right, privilege, or immunity protected and guar-
anteed by such treaty, do the federal courts acquire juris-
diction. As said by the Supreme Court of the United
States in Asakura v. Seattle, 265 U. S. 332-341, 68 L. Ed.
1041-1044:
"Treaties for the protection of citizens of one
country residing in the territory of another are numer-
ous, and make for good understanding between na-
tions. * * * The rule of equality established by
it cannot be rendered nugatory in any part of the
United States by municipal ordinances or state laws/'*"
*Italics appearing in this brief are ours unless otherwise indicated.
The rights given by treaties are not protected against
individual action any more than the rights guaranteed by
the Fifth and the Fourteenth Amendments to the Consti-
tution are protected against individual action. (Point VI,
infra. )
The quotations from the opinions of Mr. Justice Black
and Mr. Justice Murphy in Oyama v. State of California,
332 U. S. 633, 68 S. Ct. 269 at 277 and 278, appearing
on page ZZ of appellant's opening brief, in no manner
sustain appellant's contention that the District Court has
jurisdiction of the instant action under the United Na-
tions Charter. The question before the Supreme Court
in the Oyama case, supra, was whether a statute of the
State of California unconstitutionally abridged the rights
of a Japanese alien. That Mr. Justice Black in referring,
as he did, to the Charter of the United Nations had in
mind State action, as distinguished from action of private
individuals, is clearly evidenced by his use of the words
"if state laws," appearing in the last sentence of the
quotation from his opinion set forth in appellant's brief
and reading as follows :
"How can this nation be faithful to this international
pledge if state laws which bar land ownership and
occupancy by aliens on account of race are permitted
to be enforced?"
The use of the word "statute" in the concluding sentence
of the quotation from Mr. Justice Murphy's opinion is
likewise significant, such sentence reading as follows :
"Its" (referring to the Alien Land Law) "incon-
sistency with the Charter, which has been duly rati-
fied and adopted by the United States, is but one
more reason why the statute must be condemned."
—7—
II.
A Case Does Not Arise "Under the Constitution or
Laws of the United States" Unless It Involves a
Real and Substantial Dispute Respecting the
Validity, Construction, or Effect of the Constitu-
tion or Such Laws, Upon the Determination of
Which the Result Depends.
Authorities :
Shdthis V. McDougal, 225 U. S. 561, 569, 56 L.
Ed. 1205, 1211;
Gully V. First National Bank, 299 U. S. 109, 112,
81 L. Ed. 70, 72;
Schatte, et al. v. International Alliance, etc., et al.,
70 Fed. Supp. 1008; affirmed 165 F. 2d 216 (9th
C. C. A.), cert, denied May 3, 1947, 68 S. Ct.
1018, 92 L. Ed. 985.
In Shulthis v. McDougal, 225 U. S. 561, 569, 56 L. Ed.
1205, 1211, the Supreme Court said:
"A suit to enforce a right which takes its origin
in the laws of the United States is not necessarily,
or for that reason alone, one arising under those laws,
for a suit does not so arise unless it really and sub-
stantially involves a dispute or controversy respecting
the validity, construction or effect of such a law, upon
the determination of which the result depends."
And in Gully v. First National Bank, 299 U. S. 109,
112, 81 L. Ed. 70, 72, the same court used this language:
"How and when a case arises 'under the Constitu-
tion or laws of the United States' has been much con-
sidered in the books. Some tests are well established.
To bring a case within the statute, a right or im-
munity created by the Constitution or laws of the
United States must be an element, and an essential
one, of the plaintiff's cause of action. (Citing cases.)
The right or immunity must he such that it will he
supported if the Constitution or laws of the United
States are given one construction or effect, and de-
feated if they receive another."
Schatte, et al. v. International Alliance, supra, which is
the latest authority on the subject, states the rules as fol-
lows:
"From the mere fact that a right was established
by federal law, it does not follow that all litigation
growing therefrom arises under the laws of the
United States. Actions growing from the issue of
federal land grants do not arise 'under the laws of the
United States.' Shoshone Mining Co. v. Rutter, 177
U. S. 505, 20 S. Ct. 726, 44 L. Ed. 864; Shidthis
V. McDougal, 225 U. S. 561, 569, 32 S. Ct. 704, 707,
56 L. Ed. 1205 ; Marshall v. Desert Properties, 9 Cir.,
103 F. 2d 551, certiorari denied 308 U. S. 563, 60 S.
Ct. 74, 84 L. Ed. 473. An action brought to enforce
a right under a contract which is made as the result of
rights granted under the patent laws to receive royal-
ties upon sale or license of the patented device is not
an action arising under the laws of the United States.
Odell V. Farnsworth, 250 U. S. 501, 504, 39 S. Ct.
516, 63 L. Ed. 1111. To come within the provisions
of these sections, the suit must really and substan-
tially involve a dispute respecting the validity, con-
struction, or effect of some law of the United States,
upon the determination of which the result depends.
M alone v. Gardner, 4 Cir., 62 F. 2d 15; Delaware,
Lackawanna & Western R. v. Slocum, D. C, 56 F.
Supp. 634."
III.
District Court Had No Jurisdiction Herein by Virtue
of Any of the Provisions of the Anti-Trust Laws.
Authorities :
U. S. C. A., Section 41(23), Title 28;
U. S. C. A., Section 15, Title 15;
U. S. C. A., Section 17, Title 15;
Allen Bradley Co. v. Local Union No. 3, 325 U. S.
797, 89 L. Ed. 1939;
Hunt V. Crumhoch, 325 U. S. 821, 89 L. Ed. 1954;
United States v. Hutcheson, 312 U. S. 219, 85 L.
Ed. 788.
Section 41(23), Title 28, U. S. C. A., grants jurisdic-
tion to the District Courts "of all suits and proceedings
arising under any law to protect trade and commerce
against restraints and monopolies," and Section 15, Title
15, provides that "any person who shall be injured in his
business or property by reason of anything forbidden in
the anti-trust laws may sue therefor in any district court
of the United States in the district in which the defendant
resides or is found or has an agent, without respect to the
amount in controversy, and shall recover threefold the
damages by him sustained, and the cost of suit, including
a reasonable attorney's fee." The foregoing are among
the statutes of the United States which appellant claims
vest jurisdiction in this Court over the instant action;
we submit that there is nothing in the complaint which
even remotely suggests that the cause of action sought to
be described therein comes within the provisions of the
Anti-Trust Laws. Section 17, Title 15. U. S. C. A., which
is part of the federal statutes relating to monopolies and
— 10-
combinations, specifically excludes labor organizations
from the terms of the Anti-Trust Laws. It reads as
follows :
''The labor of a human being" is not a commodity
or article of commerce. Nothing contained in the
anti-trust laws shall be construed to forbid the ex-
istence and operation of labor, agricultural, or horti-
cultural organisations, instituted for the purposes of
mutual help, and not having capital stock or conducted
for profit, or to forbid or restrain individual members
of such organisations from lawfidly carrying out the
legitimate objects thereof; nor shall such organisa-
tions, or the members thereof, be held or construed
to be illegal combinations or conspiracies in restraint
of trade, under the anti-trust laws.''
The Supreme Court of the United States has on nu-
merous occasions held that, irrespective of the effect of its
action upon interstate commerce, a labor union acting
alone, and not in combination with business men, does not
violate the Sherman Anti-Trust Act; there are no allega-
tions in the complaint herein which even hint at any com-
bination between Defendant Local and employers to re-
strain competition in, or to monopolize the marketing of,
or fix prices of, any product of such employers moving
in interstate commerce. The facts set forth in the com-
plaint in the instant case bear no resemblance to the situa-
tion which was before the Supreme Court of the United
States in Allen Bradley Co. v. Local Union No. 3, 325
U. S. 797, 89 L. Ed. 1939. That the closed-shop contract
possessed by Defendant Local, the operation of which
precludes plaintiff from obtaining employment as a first
cameraman with the employers with whom Defendant
Local has such closed-shop contract, is a legitimate objec-
—11—
tive of organized labor, that is to say, that closed-shop
contracts are valid and enforceable, is such an elementary
proposition that no citation of authority in support there-
of is necessary. Not only is Defendant Local specifically
excluded from the provisions of the Sherman Anti-Trust
Laws by reason of the express terms of Section 17, Title
15, U. S. C. A., above quoted, but the rule of law enun-
ciated by the Supreme Court of the United States in Hunt
V. Crumhoch, 325 U. ^. 821, 89 L. Ed. 1954; Vnited
State V. Hutcheson, 312 U. S. 219, 85 L. Ed. 788, and
other cases, is controlling. It is only when labor organiza-
tions aid and combine with non-labor groups to create
business monopolies and to control the marketing of goods
that the provisions of the Sherman Anti-Trust Law be-
come applicable. As said by our Supreme Court in the
Hutcheson case, 312 U. S. at 232, 85 L. Ed. at 793:
"So long as a union acts in its self-interest and
does not combine with non-labor groups, the licit and
the illicit under Section 20 are not to be distinguished
by any judgment regarding the wisdom or unwisdom,
the rightness or wrongness, the selfishness or un-
selfishness of the end of which the particular union
activities are the means."
And as said by the Supreme Court of the United States
in Hunt v. Crumhoch, 89 L. Ed. 1956, 325 U. S. at 825:
"A worker is privileged under congressional enact-
ments, acting either alone or in concert with his
fellow workers, to associate or to decline to associate
with other workers, to accept, refuse to accept, or to
terminate a relationship of employment, and his labor
is not to be treated as 'a commodity or article of
commerce.' Clayton Act, 38 Stat. 730, 731, c. 323;
Norris-Laguardia Act (March 23, 1932), 47 Stat.
—12—
70, 90, 29 USCA, Section 101, 9 FCA title 29, Sec-
tion 101. See also American Foundries v, Tri-City
Central Trades Council, 257 US 184, 209, 66 L.
Ed. 189, 199, 42 S. Ct. 72, 27 ALR 360."
Concedely it is the law in California and in some other
jurisdictions that, while a closed shop of itself is lawful
and an arbitrarily closed union of itself is lawful, the syn-
chronization of both is condemned as a "monopoly." This
doctrine was first enunciated in the James case (25 Cal.
2d 721), and has been followed in companion cases there-
to. The relief which has been granted in the California
Courts to a person unable to obtain employment at a par-
ticular job, by reason of the existence of a close-shop
contract and the arbitrary refusal of the labor organiza-
tion possessing such closed-shop contract to admit such
person into membership, consists in directing such labor
organization to admit such person into membership or be
restrained from enforcing the closed shop against him.
The relief has always been granted in the alternative; the
labor organization has its choice between admission of the
applicant to membership or permitting him to work with-
out indicia of membership. It must be emphasized, how-
ever, that even under the James case doctrine rejection of
membership must be arbitrary, and if an applicant cannot
meet reasonable requirements, terms, and conditions appli-
cable to all, his rejection for that reason is not considered
arbitrary. As was said in the Williams case (27 Cal. 2d
586 at 591), companion case to the James case:
"The individual worker denied the right to keep
his job suffers a loss, and his right to protection
—13—
against such arbitrary and discriminatory exclusion
from union membership should be recognized where-
ever membership is a necessary prerequisite to work."
and the Court protected such "right" by restraining the
labor organization from enforcing its closed-shop contract
against the plaintiff in the particular case. Furthermore,
the Supreme Court of California in the James case recog-
nized "the right of the union to reject or expel persons
who refuse to abide by any reasonable regulation of lawful
policy adopted by the union." (25 Cal. 2d at 736.)
In the James and companion cases, the plaintiifs therein
were Negroes; the defendant labor organization holding
the closed-shop contract, by its constitution, specifically
excluded Negroes from membership. The discrimination,
therefore, was one based solely upon skin pigmentation.
The same situation existed in the Corsi case (326 U. S.
88, 89 L. Ed. 2072), cited by appellant in his brief herein.
That situation does not exist in the instant case. We
deny, but will assume arguendo, that under the doctrine
of the James case Defendant Local has a "monopoly," as
that word is used in the State Court decision, in view of
the synchronization of its closed shop and alleged closed
union. Nevertheless, such fact in no manner gives this
Court jurisdiction of the instant controversy. The monop-
oly contemplated by the federal anti-trust laws is not such
a "monopoly" as that described in the James and com-
panion cases, i.e., "of the supply of labor." Furtliermore
by the express terms of the federal anti-trust laws labor
organizations are excluded from their operation.
—14—
IV.
Statutes of the United States "Regulating Commerce"
Do Not Vest Jurisdiction in the District Court
Over the Instant Action.
Authorities :
U. S. C. A., Section 41(8), Title 28;
Delaware L. & W. R. Co. v. Slocum, 56 Fed. Supp.
634;
Schatte, et al. v. International Alliance, etc., et al.,
70 Fed. Supp. 1008, Affirmed 165 F. 2d 216
(C. C. A. 9th), cert, denied May 3, 1947, 68 S.
Ct, 1018, 92 L. Ed. 985.
Appellant asserts that the District Court has jurisdic-
tion by reason of Section 41(8), Title 28, U. S. C. A.,
which grants jurisdiction to the United States District
Courts "of all suits and proceedings arising under any law
regulating commerce"; we submit that this statute has no
application herein. The controversy presented by appel-
lant's complaint does not arise out of any law regulating
commerce; the fact that a controversy may affect inter-
state commerce does not give District Courts of the United
States jurisdiction of such controversies.
In Delaware L. & W. R. Co. v. Slocum, 56 Fep. Supp.
634, the District Court for the Western District of New
York had before it an action filed by an employer against
competing labor unions in which declaratory relief was
sought, the employer desiring a judgment construing cer-
tain separate contracts between the employer and two
—15—
labor organizations. Each of the labor organizations
claimed jurisdiction over and the right to represent "crew
callers" and insisted that under their respective contracts
with the employer each had jurisdiction over such classifi-
cation of work. Motions to dismiss were interposed upon
the ground that the Court lacked jurisdiction. We quote
from the opinion as follows :
"A suit does not arise under the laws of the United
States unless it 'really and substantially involves a
dispute or controversy respecting the validity, con-
struction, or effect of some law of the United States,
upon the determination of which the result depends.'
(Citing cases.) It is patent from the complaint that
this suit does not involve the Validity, construction,
or effect' of any federal statute, but rather seeks the
determination of its rights or liabilities under certain
contracts. It has been urged that this is a suit for
a violation of the commerce laws, 28 U. S. C. A., Sec.
41(8), and that this court has original jurisdiction.
The nature of the suit is to be determined by the com-
plaint (citing cases) and nothing therein reveals
that the acts charged have any relation to the com-
merce laws. It is true that the plaintiff in the opera-
tion of its railroad was engaged in interstate com-
merce, but the mere fact that interstate couimcrce
may he affected is not sufficient to give jurisdiction
in a private suit unless the suit directly concerns an
Act of Congress. (Citing cases.)"
—16—
To the same effect is Schatte, et al. v. International
Alliance, supra:
"28 U. S. C. A., Sec. 41(8) confers jurisdiction
on the District Courts of the United States in 'all
suits and proceeding's arising under any law regu-
lating commerce,' without regard to the jurisdictional
amount requirement of 28 U. S. C. A., Sec. 41(1).
Since more than $3,000 is involved in this action,
Section 41(8) will not establish jurisdiction in this
court if it cannot be established under Section 41(1),
which grants jurisdiction in all suits where the mat-
ter in controversy exceeds $3,000 and 'arises under
the Constitution or laws of the United States.'
'Tt is not enough that the dispute should merely
affect commerce to bring it within the scope of Sec-
tion 41(8) or Section 41(1). Delaware, Lackawanna
& Western R. v. Slocum, D. C, 56 Fed. Supp. 634.
"In Gully V. First National Bank, 299 U. S. 109,
at page 112, 57 S. Ct. 96, at page 97, 81 L. Ed. 70,
Mr. Justice Cardozo said:
" 'To bring a case within the statute, a right or
immunity created by the Constitution or laws of the
United States must be an element, and an essential
one, of the plaintiff's cause of action. * * * The
right or immunity must be such that it will be sup-
ported if the Constitution or laws of the United
States are given one construction or effect, and de-
feated if they receive another.' "
—17—
V.
Neither National Labor Relations Act Nor Labor-
Management Relations Act, 1947, Vests Jurisdic-
tion in the District Court Over Subject Matter of
Action or Parties Thereto.
Authorities :
N. L. R. A., 29 U. S. C. A„ Sections 151-166;
L. M. R. A., 1947, 29 U. S. C. A, Sections 141-
197;
Donnelly Garment Co. v. International Ladies'
Garment Workers' Union, 99 F. 2d 309 at 315;
Fur Workers Union, etc. v. Fur Workers Union,
105 F. 2d 1 at 12 (affirmed in 308 U. S. 522,
84 L. Ed. 443);
A^. L. R. A., Section 10(e), (1);
L. M. R. A., 1947, Section 301(a);
L. M. R. A., 1947, Section 303;
L. M. R. A., 1947, Section 102;
L. M. R. A., 1947, Section 8(3) ;
Amazon Mills Co. v. Textile Workers Union (C.
C A. 4, 1948), 167 F. 2d 183;
Gerry of California v. Superior Court (1948), 32
A. C. 141, 194 P. 2d 689.
Among the statutes of the United States asserted by
appellant as vesting jurisdiction in the District Court are
the National Labor Relations Act (N. L. R. A.) (29
U. S. C. A., Sections 151-166) enacted July 5, 1935, and
its successor, the Labor- Management Relations Act, 1947,
(L. M. R. A.) (29 U. S. C. A., Sections 141-197) enacted
—18—
June 23, 1947, with certain provisions respecting closed
shops not operative until August 22, 1947. Under N. L.
R. A. no jurisdiction of any sort was vested in the District
Courts of the United States ; the National Labor Relations
Board was given exclusive power to enforce rights guar-
anteed by that Act to employees, subject only to review
by the proper Circuit Courts of Appeals. Thus, Section
10(a) of the N. L. R. A. (29 U. S. C. A., 160(a)), reads
as follows:
"The Board is empowered, as hereinafter provided,
to prevent any person from engaging in any unfair
labor practice (listed in section 158) affecting com-
merce. This power shall be exclusive, and shall not
be affected by any other means of adjustment or pre-
vention that has been or may be established by agree-
ment, code, law, or otherwise."
Judge Sanborn, speaking for the Circuit Court of Ap-
peals, Eight Circuit, in Donnelly Garment Co. v. Interna-
tional Ladies' Garment Workers' Union, 99 F. 2d 309 at
315, said:
"It also seems clear to us that the only jurisdiction
conferred by the National Labor Relations Act upon
federal courts is that conferred upon the Circuit
Courts of Appeals with respect to enforcing, modify-
ing and setting aside orders of the National Labor
Relations Board."
The relative jurisdictions of the Federal Courts and the
National Labor Relations Board under the provisions of
N. L. R. A. are expressed clearly and at length by the
—19—
United States Court of Appeals for the District of Colum-
bia in Fur Workers Union, etc. v. Fur Workers Union,
105 F. 2d 1 at 12 (affirmed in 308 U. S. 522, 84 L. Ed.
443).
Other decisions exist and might be cited in support of
our contention that District Courts of the United States
under N. L. R. A. had no jurisdiction of actions such as
that set forth in the complaint herein, or, for that matter,
any other action purportedly arising" under N. L. R. A.
However, in view of the fact that the rule above set forth
is so clearly and uniformly established, without dissent or
suggestion thereof, we deem it unnecessary to cite further
authorities.
It is true that when Congress enacted L. M. R. A., 1947,
it vested in District Courts of the United States jurisdic-
tion over certain actions, which jurisdiction had not pre-
viously been vested in such Courts pursuant to N. L. R. A.
By the terms of Section 10(e), (1), the National Labor
Relations Board in its own name may institute actions in
the appropriate District Courts to restrain certain speci-
fically defined unfair labor practices. Obviously, the com-
plaint in the instant case does not come within the pur-
view of such Section ; jurisdiction thereby is vested only in
actions brought by the N. L. R. B. and for the purpose of
preventing certain unfair labor practices.
Another section of L. M. R. A., 1947, vesting jurisdic-
tion in the District Courts, where such jurisdiction did not
previously exist, is Section 301(a), which reads as fol-
lows:
"Suits for violation of contracts between an em-
ployer and a labor organization representing em-
ployees in an industry affecting commerce as defined
in this Act, or between any such labor organizations,
—20—
may be brought in any district court of the United
States having- jurisdiction of the parties, without
respect to the amount in controversy or without re-
gard to the citizenship of the parties."
The instant case does not come within the foregoing
and above quoted section because (a) it is not a suit for
violation of a contract between an employer and a labor
organization, etc., and (b) said section does not contem-
plate an action brought by an individual, but was intended
by Congress to grant jurisdiction to the United States
District Courts in actions between employers and labor
organizations based upon alleged violations of collective
bargaining agreements.
Section 303, L. M. R. A., 1947, makes unlawful, for the
purposes of that section only, secondary boycotts, unfair
labor practices, and jurisdictional strikes, and then pro-
vides in subsection (b) thereof as follows:
''Whoever shall be injured in his business or prop-
erty by reason of any violation of subsection (a) may
sue therefor in any district court of the United States
subject to the limitations and provisions of section
301 hereof without respect to the amount in contro-
versy, or in any other court having jurisdiction of
the parties, and shall recover the damages by him sus-
tained and the cost of the suit."
Since the complaint herein does not in any manner re-
late to secondary boycotts, unfair labor practices, or juris-
dictional strikes, the subject matter thereof does not come
within the provisions of Section 303 above quoted. Fur-
—21—
thermore, while Section 301 specifically waives amount in
controversy and diversity of citizenship, Section 303
waives only amount in controversy; thus, in any event, in
an action brought under Section 303 diversity of citizen-
ship is a requisite.
District Courts of the United States are likewise given
jurisdiction with respect to the criminal provision defined
in Section 302, L. M. R. A., 1947, relating to restrictions
on payments to employee representatives, but, of course
appellant makes no claim that pursuant to that section the
District Court has jurisdiction over the instant action. So
far as we are advised, the foregoing constitute the only
provisions of L. M. R. A., 1947, vesting jurisdiction in Dis-
trict Courts of the United States, and such jurisdiction
in those instances is expressly limited as to parties and
subject matter; neither appellant nor the subject matter
of his action comes within the purview of such permitted
actions or vested jurisdiction. Furthermore, under Sec-
tion 102, L. M. R. A., 1947, any closed-shop contract exist-
ing on June 23, 1947, when that Act was enacted, is
recognized as being valid and enforceable to the date of
its expiration, and any closed-shop contract executed prior
to August 22, 1947, and after June 22nd, 1947, is likewise
so recognized, provided it is not for a period of more than
one year. The complaint in the instant case (Paragraph
VII (8)) sets forth the fact that Defendant Local has
a closed-shop contract ending December 31, 1948, which
was executed on January 1, 1946. Hence, under the terms
of said Section 102, L. M. R. A., 1947, the closed-shop
-22—
contract of Defendant Local is valid, enforceable, and not
against public policy. Upon the expiration of the closed-
shop contract held by Defendant Local appellant has the
right, pursuant to Section 8(3) of L. M. R. A., 1947,
to obtain employment as a first cameraman, if such he
can obtain, without being a member of Defendant Local,
and within thirty days after obtaining such employment
must apply for membership in Defendant Local provided,
in accordance with said section of that Act, Defendant
Local then has a Union Shop, and if Defendant Local
does not accept him into membership in accordance with
said section it cannot exercise its economic strength or
in any manner bring about appellant's discharge by his
employer.
If the acts of the appellees of which appellant complains
constitute violations of the Labor-Management Relations
Act, 1947, no District Court has jurisdiction over same
as such jurisdiction is by said Act vested exclusively in the
National Labor Relations Board. {Amazon Mills Co. v.
Textile Workers Union, supra; Gerry of California v.
Superior Court, supra.)
—23—
VI.
Jurisdiction Is Not Vested in the District Court Over
the Instant Action Under the Fifth or the Four-
teenth Amendments to the Constitution of the
United States, Nor by Secion 41, Title 28, USCA,
or Any Subsection Thereof, Section 43, Title 8,
USCA, Section 47(3), Title 8, USCA, Section 48,
Title 8, USCA, Nor by Civil Rights Statutes.
Authorities :
Corrigan v. Buckley, 271 U. S. 323, 330, 70 L. Ed.
969, 972;
Civil Rights Cases, 109 U. S. 3, 27 L. Ed. 836;
Virginia v. Rives, 100 U. S. 313, 25 L. Ed. 667;
United States v. Harris, 106 U. S. 629, 639, 27 L.
Ed. 290, 294;
California Oil and Gas Co. v. Miller, 96 Fed. 12,
22;
Love V. Chandler, 124 F. 2d 785 (C. C. A. 8) ;
Simpson v. Geary, 204 Fed. 507 ;
Mitchell V. Greenough (C. C. A. 9), 100 F. 2d
184, 187; cert, denied 306 U. S. 659, 83 L. Ed.
1056;
Love V. United States, 108 F. 2d 43, 45-46 (cert,
denied 309 U. S. 673, 84 L. Ed. 1018) ;
Brents v. Stone, et al., 60 Fed. Supp. 82;
Emmons v. Sniitt, et al., 58 Fed. Supp. 869;
Haywood v. United States, 268 Fed. 795 ;
United States v. Moore, 129 Fed. 630;
Schatte, et al. v. Internatioiial Alliance, etc., et al.,
70 Fed. Supp. 1008; affirmed 165 F. 2d 216 (9th
C. C. A.); cert, denied 92 L. Ed. 985.
—24—
The Constitutional Amendments and Statutes of the
United States referred in the above point are relied upon
by appellant in support of his contention that the District
Court has jurisdiction of the subject matter of and parties
to this action. They all relate to the powers, privileges,
and immunities granted citizens of and persons residing in
the United States. In our opinion, the cause of action
which appellant seeks to allege in his complaint is not one
arising out of, secured by, nor dependent upon any of the
Constitutional Amendments or Statutes which we have
grouped for discussion under this point.
It has long been settled that the Fifth Amendment to
the Constitution of the United States is a limitation only
upon the federal government and does not limit individual
action. In the language of Corrigan v. Buckley, 271 U. S.
323, 330, 70 L. Ed. 969, 972 :
"The 5th Amendment 'is a limitation only upon the
powers of the general government,' Talton v. Mayes,
163 U. S. 376, 382, 41 L. Ed. 196, 198, 16 Sup. Ct
Rep. 986, and is not directed against the action of
individuals."
In the Civil Rights Cases, 109 U. S. 3, 27 L. Ed. 836,
the Supreme Court of the United States, years ago, inter-
preted the Fourteenth Amendment to the Constitution of
the United States as applying solely to state action and not
to individual action. In the language of that Court in
that decision:
"It is state action of a particular character that is
prohibited. Therefore, invasion of individual rights
is not the subject matter Qf the Amendment. . . ."
—25—
Similarly, in Virginia v. Rives, 100 U. S. 313, 25 L.
Ed. 667, in referring' to Section 1 of the Fourteenth
Amendment, the Court stated at page 318 of 100 U. S.
and at page 669 of 25 L. Ed. that :
"The provisions of the 14th Amendment of the
Constitution we have quoted all have reference to
state action exclusively, and not to any action of
private individuals."
See also,
United States v. Harris, 106 U. S. 629, 639, 27 L.
Ed. 290, 294 and
California Oil and Gas Co. v. Miller, 96 Fed. 12,
22.
All of the Civil Rights Statutes have been construed,
as was the Fourteenth Amendment, to provide redress
against state action, and not against the invasion of private
rights by individuals. These principles, and the authorities
establishing them, are summarized in Love v. Chandler,
124 F. 2d 785 at 786-787, quotation from which appears
as appendix A hereof.
In Simpson v. Geary, 204 Fed. 507, the plaintiffs con-
tended that they were deprived of their right to work as
brakemen and flagmen by reason of an Arizona law. In
holding that no Federal jurisdiction could be invoked on
the facts alleged in the complaint, the Court stated as
follows :
"The right to contract for and retain employment in
a given occupation or calling is not a right secured
by the Constitittion of the United States, nor b\ any
Constitution. It is primarily a natural right, and it
is only when a state lazv rcgidating such employment
—26—
discriminates arbitrarily against the equal right of
some class of citizens of the United States, or some
class of persons within its jurisdiction, as, for ex-
ample, on account of race or color, that the civil rights
of such persons are invaded, and the protection of the
federal Constitution can he invoked to protect the in-
dividual in his employment or calling."
In Mitchell v. Greenough (C. C. A. 9), 100 F. 2d 184,
187, that Court, in construing 8 U. S. C. A. 47, stated
as follows :
"The prohiibtion against 'denial of the equal pro-
tection of the law' was to prevent class legislation or
action."
A lengthy dissertation in accord with the Chandler de-
cision will be found in Love v. United States, 108 F. 2d
43, 45-46 (cert, denied 309 U. S. 673, 84 L. Ed. 1018),
in which the Circuit Court of Appeals for the 8th Circuit
said:
"Certain disputes which have arisen on various oc-
casions in the course of our history in respect to the
tenure of 'offices' and the power to make removals of
incumbents or to replace them with other appointees,
have called forth the utmost effort of the courts to
find peaceful solution in law and reason. Several
such controversies were recognized to be of far-reach-
ing importance. They were justiciable and were settled
upon profound consideration by judicial determina-
tion.
''But such determination has alzvays been rested
upon the interpretation and application of the pro-
visions of the constitution and federal enactments.
It cannot be predicated upon any judicial concept con-
cerning an able-bodied, competent and willing man's
—27—
natural or inherent right to zvork. Unless a legal
right has been defined and conferred by legislative
authority, no justiciable controversy is present. The
principles applicable are the same in the field of gov-
ermnent work as in the broader field of private enter-
prise. The right to work at a particidar employment
must be shown to have become vested by law in the
person asserting it. (Citing cases.)"
A case involving the question of the right to practice
law and whether it is protected by the Constitution or
Statutes of the United States is Brents v. Stone, et al.,
60 Fed. Supp. 82, from which we quote as follows on
page 84:
"Nor can the action be sustained as one to secure
protection of civil rights under the Federal Consti-
ution, for a license to practice law is not a privilege
within the purview of any constitutional provision.
(Citing cases.)"
To the same effect is:
Emmons v. Smitt, et al., 58 Fed. Supp. 869.
Other decisions which hold adversely to the contention
of appellant that the District Court has jurisdiction either
under the Fifth or the Fourteenth Amendments to the
Federal Constitution or under the Civil Rights Statutes
are Haywood v. United States, 268 Fed. 795, in which the
Circuit Court of Appeals for the Seventh Circuit said at
pages 800-801, "to produce, to sell, to contract to sell to
any buyer, are not rights or privileges conferred by the
Constitution and laws of the United States," and United
States V. Moore, 129 Fed. 630, in which it was held that
the right of a citizen to organize persons in any pursuit
—28—
was a fundamental right in all free governments, but was
not a right, privilege, or immunity granted or secured to
citizens of the United States by its Constitution or laws,
and is left solely to the protection of the states.
Schatte, et al. v. International Alliance, etc., et al., 70
Fed. Supp. 1008 at 1010-1011, 165 F. 2d 216, cert, de-
nied 92 L. Ed. 985, the latest decision on the subject,
summarizes the applicable law as follows :
'\ . . this court would still be without jurisdic-
tion, since these statutes" (Sec. 41(12), Title 28, Sec.
47(3), Title 8) "were passed to protect individuals
from violations of their rights by State action, and
none is here alleged. Love v. Chandler, 8 Cir., 124
F. 2d 785, 786, 787. Only rights of citizens under
the laws of the United States are protected. Mitchell
V. Greenough, 9 Cir., 100 F. 2d 184, certiorari denied
306 U. S. 659, 59 S. Ct. 788, 83 L. Ed. 1056. That
being true, since more than $3,000 is admittedly in-
volved, this section can in no event confer any juris-
diction not already given by 28 U. S. C. A., Sec.
41(1), which is hereinafter discussed.
"28 U. S. C. A., Sec. 41(1) and 8 U. S. C. A.,
Sec. 43 provide for redress for deprivations of rights
under color of any law, statute, ordinance, regulation,
custom, or usage of any State or Territory, in express
terms. It is not alleged that the defendants are act-
ing under color of any State law, etc., so these sec-
tions cannot act to establish jurisdiction in this court.
Allen V. Corsano, D. C, 56 F. Supp. 169; California
Oil & Gas Co. V. Miller, C. C. Cal, 96 F. 12, 22.
Picking v. Pennsylvania R., 3 Cir., 151 F. 2d 240, is
not applicable here, because the wrongs alleged in that
case were all under color of State law.
—29—
''The Fifth and Fourteenth Amendments of the
Constitution are designed to protect the individual
from invasion of his rights, privileges and immuni-
ties by the federal and the State governments re-
spectively Corrigan v. Buckley, 271 U. S. 323, 330,
46 S. Ct. 521, 70 L. Ed. 969; Civil Rights Cases, 109
U. S. 3, 3 S. Ct. 18, 27 L. Ed. 835. Neither Hague
V. C. I. O., 307 U. S. 496, 59 S. Ct. 954, 83 L. Ed.
1423, nor Screws v. United States, 325 U. S. 91, 65 S.
Ct. 1031, 89 L. Ed. 1495, 162 A. L. R. 1330, has over-
ruled these cases, even by implication, for the wrongs
complained of in both the Hague and the Screws case
were committed by the government or under color of
law.
"The bare right to work is not a right protected by
federal law. Love v. United States, 8 Cir. 108 F.
2d 43, certiorari denied 309 U. S. 673, 60 S. Ct. 716,
84 L. Ed. 1018, and cases therein cited; Brents v.
Stone, D. C, 60 F. Supp. 82, 84; Emmons v. Smitt,
D. C, 58 F. Supp. 869, affirmed 6 Cir., 149 F. 2d
869, 872."
From the foregoing, it appears clear that the right to
contract for and retain employment in a given occupation
or calling {Simpson v. Geary, supra; Love v. Chandler,
supra), the right to be admitted to the practice of law
{Mitchell V. Greenough, supra; Brents v. Stone, et al.,
supra; Emmons v. Smitt, et al., supra), the right to work
at a particular employment {Love v. United States, supra),
the right to produce, to sell, to contract to sell to any buyer
{Haywood v. United States, supra), the right to organize
persons in any pursuit [United States v. Moore, supra),
or the right to work as a set erector in the Hollywood
—30-
Studios under a contract negotiated pursuant to the terms
of the National Labor Relations Act {Schatte, et al. v. In-
ternational Alliance, etc., et al., supra), are not rights,
privileges, or immunities granted or secured to citizens
or residents of the United States by its Constitution or
laws; certainly, therefore the "right" to work as a first
cameraman in the Hollywood Studios is not such a right.
VII.
No Provision of the California Labor Code Can Vest
Jurisdiction in the District Court.
Authorities :
Labor Code, State of California, Sections 921 to
925;
Shafer v. Registered Pharmacists Union, 16 Gal.
2d 379;
Smith Metropolitan Market Co. v. Lyons, 16 Cal.
2d 389.
Among the statutes and laws relied upon by appellant
as vesting jurisdiction in the District Court, are Sections
921 to 925, inclusive, Labor Code, State of California.
That the close-shop contract existing between Defendant
Local and the Studio employers of first cameramen is
valid despite any provision of the California Labor Code
is clearly established by numerous decisions of the Cali-
fornia Supreme Court, including Shafer v. Registered
Pharmacists Union, 16 Cal. 2d 379, and Smith Metropoli-
tan Market Co. v. Lyons, 16 Cal. 2d 389.
It is elementary that the jurisdiction of District Courts
of the United States stems from and is to be found only in
the Constitution and statutes of the United States ; no state
law can enlarge or diminish the scope of such jurisdiction.
—31—
VIII.
Requirement in Constitution of the Alliance That
Members Be Citizens of the United States or of
Canada, or of Any Other Territory in Which the
Alliance Exercises Jurisdiction, Is Reasonable and
Valid and Violates No Right of Appellant Pro-
tected by Any Provision of the Constitution or
Laws of the United States; Aliens May Lawfully
Be Excluded From Privileges Extended by Law
to Citizens.
The foregoing proposition is illustrated by the following
examples :
Aliens may be excluded from owning a pool hall busi-
ness (Clarke v. Deckehach, 27 A U. S. 392, 71 L. Ed.
1115), from public employment (Heim v. McCall, 239
U. S. 173, 60 L. Ed. 206), from taking game as a sports-
man (Patsone v. Pennsylvania, 32 U. S. 183, 58 L. Ed.
539) ; and they may be denied the right to ownership or
interest in the real property of a state (Terrace v. Thomp-
son, 263 U. S. 197, 68 L. Ed. 255).
A number of federal statutes preclude aliens from en-
tering into certain activities. Examples of such statutes
are as follows:
(1) No radio station license can be granted or held by
any alien or the representative of any alien or by any cor-
poration in which more than one-fourth of the directors
are aliens or more than one-fourth of the capital stock is
owned or voted by aliens, 47 U. S. C. A., Telegraphs,
Telephones and Radio Telegraphs, Section 310.
—32—
(2) Aliens are precluded from taking animals or birds
by use of firearms in the territories and insular posses-
sions of the United States except under a special alien
license. In the obtaining of a license to sell or engage in
the trade or selling of the skins of fur-bearing animals,
an alien is charged a considerably greater license fee
than is a resident of the territory involved or a non-resi-
dent of the territory who is a citizen of the United States,
48 U. S. C. A., Territories and Insular Possessions, Sec-
tion 189, Subdivisions (e) and (h).
(3) No alien can homestead federal lands unless he has
filed his declaration of intention to become a citizen, 43
U. S. C. A., Public Lands, Section 16.
(4) Aliens may obtain leases and prospecting permits
as to federal lands only on a limited basis, 30 U. S. C. A.,
Mineral Lands and Mining, Section 181.
(5) An alien who has not declared his intention to be-
come a citizen of the United States may not acquire title
to any land in the territories of the United States with lim-
ited exceptions, 8 U. S. C. A., Aliens and Nationality, Sec-
tion 71.
The same rule applies to the ''acquisition, holding, own-
ing, and disposition of real estate in the District of Colum-
bia," 8 U. S. C. A., Aliens and Nationality, Section 78,
and applies, on even a broader basis, in Hawaii, 8 U. S.
C. A., Aliens and Nationality, Section 83. No telegraph
or cable lines owned or operated or controlled by aliens may
—33—
be established in or permitted to enter Alaska, 48 U. S.
C. A., Territories and Insular Possessions, Section 302(a).
Moreover, in the interest of the protection of their citi-
zens, the various states have enacted a number of statutory
provisions precluding aliens from engaging in activities or
occupations that may be entered into by citizens. Ex-
amples of such statutory enactments culled from the stat-
utes of the State of California are:
(1) It is provided in Section 118 of the Business and
Professions Code that if an alien admitted to practice law
fails to become naturalized within a reasonable time after
he is eligible, his license shall be revoked on a motion of
the attorney general by the district court of appeal which
admitted him to practice.
(2) Fishing and hunting license for sporting may be
obtained by aliens only upon the payment of license fees
greatly in excess of sums required of citizens, Fish and
Game Code, Sections 427 and 428.
(3) No alien or person who is not a citizen of the
United States may obtain a nursing license unless he has
declared his intention to become a citizen of the United
States, and if he fails to become a citizen, after having
made such declaration, his license shall become void at the
end of seven years from the date of filing such declara-
tion of intention, Business and Professions Code, Sections
2736(b), 2743, and 2744.
(4) Aliens are not entitled to old age pensions. Welfare
and Institutions Code, Section 2160(b).
—34—
(5) No person not a citizen of the United States is
eligible for a pharmaceutical license unless he shall have
filed and proven his intention to become a citizen. If
citizenship is later denied, then his license and privileges
are automatically cancelled, Business and Professions
Code, Section 4096.
(6) Section 1941 of the Labor Code provides that no
person except a citizen shall be employed in any depart-
ment of the state or any county or city. Section 1943 of
the Labor Code provides that no money shall be paid out
of the state treasury nor out of the treasury of any county
or city to any officer or employee unless such person is a
citizen.
(7) Section 1850 of the Labor Code precludes con-
tractors or sub-contractors to employ on any public work
any alien except in cases of extraordinary emergency.
In view of the foregoing, it does not seem to us to be
open to question that the provisions of the Constitution of
The Alliance, a private voluntary association, requiring
members to be citizens of the United States, Canada, or
territory in which The Alliance exercises jurisdiction, is a
reasonable and valid regulation. However, even if such
regulation were deemed arbitrary and discriminatory, such
construction thereof would in no manner vest jurisdiction
over this action and the parties in the District Court in the
absence of diversity of citizenship.
—35—
IX.
Since Defendant Local Has Never Been Nor Professed
to Be Bargaining Representative of Appellant and
Has Never Undertaken to Bargain for Him, Tun-
stall Case Doctrine Has No Application.
Authorities :
Tunstall v. Brotherhood of Locomotive Firemen^
323 U. S. 210, 65 S. Ct. 235, 89 L. Ed. 187;
Steele v. Louisville and N. R. Co., 323 U. S. 192,
65 S. Ct. 226, 89 L. Ed. 173;
Brotherhood of Locomotive Firemen, etc. v. Tun-
stall (C. C. A. 4th), 163 F. 2d 289.
The Supreme Court of the United States, on the same
day in 1944, handed down two decisions (Tunstall v.
Brotherhood of Locomotive Firemen, etc., supra, and
Steele v. Louisville and N. R. Co., supra). For conveni-
ence, we shall refer to the rule of law enunciated by these
decisions as The Tunstall Case Doctrine, which has sub-
sequently been applied in several cases in both the State
and Federal courts {Graham v. Southern Ry. Co., 74 Fed.
Supp. 663; Betts v. Easley, 161 Kan. 459, 169 P. 2d 831,
166 A. L. R. 342), which cases, including the two decisions
of the Supreme Court of the United States promulgating
The Tunstall Case Doctrine, are, in his opening brief, cited
and quoted from by appellant in support of his contention
that The Tunstall Case Doctrine is applicable, and that by
reason thereof the District Court has jurisdiction of the
instant action.
After the Supreme Court had settled the applicable law,
the Tunstall case, supra, went back to the District Court
for trial, and subsequently reached the United States Cir-
—36—
cuit Court of Appeals for the Fourth Circuit, and is re-
ported as Brotherhood of Locomotive Firemen, etc. v.
Tunstall, 163 F. 2d 289.
The factual situation forming the basis of The Tunstall
Case Doctrine is best expressed in the following- language
of the Chief Justice, taken from 89 L. Ed. at page 192
(323 U. S. at 211):
"This is a companion case to No. 45, Steele v.
Louisville & N. R. Co., decided this day (323 U. S.
192, ante, 173, 65 S. Ct. 226) in which we answered
in the affirmative a question also presented in this
case. The question is whether the Railway Labor
Act, 48 Stat. 1185, c. 691, 45 USCA, Sees. 151 et
seq., imposes on a labor organization, acting as the
exclusive bargaining representative of a craft or
class of railway employees, the duty to represent all
the employees without discrimination because of their
race. The further question in this case is whether
the federal courts have jurisdiction to entertain a
non-diversity suit in which petitioner, a railway em-
ployee subject to the Act, seeks remedies by injunction
and award of damages for the failure of the union
bargaining representative of his craft to perform the
duty imposed on it by the Act, to represent petitioner
and other members of his craft without discrimina-
tion because of race."
It appears further from the decision in the Tunstall case
that the Brotherhood of locomotive F. & E. was, pursuant
to the Railway Labor Act, the bargaining agent of the
plaintiff therein and a large number of other Negro em-
ployees similarly situated. The constitution of the Broth-
erhood specifically excluded Negroes from membership.
No closed-shop contract existed. Despite its legal obliga-
tion to fairly and without discrirnination represent all em-
ployees for which it was the bargaining agent, pursuant
to the Railway Labor Act, the Brotherhood entered into
a contract with the railroad employers which froze Negroes
on their present jobs, provided that promotions must be
made from a ''promotable pool," and that only white per-
sons could thereafter be placed in such "promotable pools."
As the Court said in its opinion (89 L. Ed. at 192, 323
U. S. 211-212):
"Petitioner complains of the discriminatory appli-
cation of the contract provisions to him and other
Negro members of his craft in favor of 'promotable,'
i. e. white, firemen, by which he has been deprived of
his pre-existing seniority rights, removed from the
interstate passenger run to which he was assigned and
then assigned to more arduous and difficult work with
longer hours in yard service, his place in the passen-
ger service being filled by a white fireman."
The opinion in the Tunstall case adopts the decision ren-
dered the same day in its companion case of Steele v.
Louisville, etc., 323 U. S. 192, 65 S. Ct. 226, 89 L. Ed.
173, in which action the plaintiff therein was likewise a
Negro and voiced the same complaint as that asserted by
Tunstall. From that opinion, we learn more of the facts
involved in each case, and we quote therefrom in Appendix
B hereof.
The foregoing quotations taken from the Tunstall and
Steele cases are sufficient, it seems to us, to clearly estab-
lish that the question presented to the Supreme Court of
the United State? therein bears no resemblance to that
—38—
which the instant controversy presents. The distinction
between the Tunstall-Steele cases and this action may be
summarized as follows: (1) In the Tunstall case, the
Railway Labor Act was involved and no closed-shop con-
tract existed (such a contract being invalid under that
Act), whereas in the instant case the National Labor Re-
lations Act is involved and a valid closed-shop contract
does exist; (2) in the Tunstall case, plaintiff therein was
and for a long period of time had been employed by the
railroad, and his duly elected bargaining agent made a
contract deliberately discriminating against him solely be-
cause of his color, whereas in the instant action appellant
is not employed in any work classification over which De-
fendant Local has or asserts jurisdiction, and Defendant
Local is not his bargaining agent; (3) in the Tunstall
case, the Brotherhood specifically excluded plaintiff be-
cause of color, whereas in the instant case no such ar-
bitrary exclusion is asserted, and exclusion because of lack
of citizenship is reasonable and not arbitrary; (4) in the
Tunstall case (as set forth in 163 F. 2d at 293) when the
action was tried on its merits after the Supreme Court
had settled the law applicable, the Brotherhood "used
its power as bargaining agent in violation of the rights
of those for zvhom it undertakes to bargain and has there-
by inflicted injury upon one of those whom it professes
to represent" whereas in the instant case the Defendant
Local is not the bargaining agent of appellant and never
has and does not now profess to represent him; (5) the
Railway Labor Act does not recognize closed-shop con-
—39—
tracts (to the contrary, closed-shop contracts are unlawful
under the Railway Labor Act (40 Opinion Atty. Gen. —
No. 39, Dec. 29, 1942)), whereas same are recognized as
valid by the National Labor Relations Act and the Taft-
Hartley Act; and (6) by the terms of the National Labor
Relations Act (Sec. 2) and Labor-Management Relations
Act, 1947 (Sec. 2), employees subject to the Railway
Labor Act are specifically excluded.
Since appellant is not, and was not when the closed-shop
contracts were executed, employed by any employer with
which Defendant Local has or had a closed-shop contract,
and since, even as a permittee of Defendant Local, his
three assignments, in 1945, in 1946, and in 1947, were not
performed at any time when the closed-shop contracts
herein were actually executed, he is a stranger to those
contracts, a stranger to the Defendant Local, and a strang-
er to the employers with whom the closed-shop contracts
existed and exist. Defendant Local has never represented
appellant as bargaining agent and has never professed to
so represent him.
As unequivocally appears from the quotations, which
we have above or in the Appendix hereto set forth, taken
from the Tunstall-Steele decisions, jurisdiction is vested
in District Courts in actions under the Railway Labor
Act against the bargaining agent, designated pursuant to
such Act, by employees, only when such actions are brought
by employees discriminated against in a contract nego-
tiated by the bargaining agent professing to represent
such employees and on whose behalf the bargaining agent
— 40—
undertook to bargain. Under the National Labor Rela-
tions Act (Section 9(a)) and the Labor-Management Re-
lations Act, 1947 (Section 9(a)), it is provided that:
''Representatives designated or selected for the
purposes of collective bargaining by the majority of
the employees in a unit appropriate for such pur-
poses, shall be the exclusive representatives of all of
the employees in such unit for the purposes of collec-
tive bargaining in respect to rates of pay, wages,
hours of employment, or other conditions of employ-
ment. Provided, that any individual employee or a
group of employees shall have the right at any time to
present grievances to their employer, etc."
It is not open to question, not only from the decisions, but
from the language immediately above quoted, which con-
tains no uncertainty or ambiguity and calls for no inter-
pretation or judicial conjecture, that under the National
Labor Relations Act and the Labor-Management Rela-
tions Act, 1947, a designated or selected bargaining agent
represents, undertakes to represent, and professes to rep-
resent only employees in the particular unit for which it is
such bargaining agent. In the instant case, as appears on
the face of the complaint. Defendant Local is the desig-
nated bargaining agent of the unit consisting of first
cameramen employed in the Studios; appellant, not being
so employed, is not within that unit; Defendant Local
does not represent him and has never undertaken or pro-
fessed to do so; it is not appellant's bargaining represen-
tative and has never represented him in negotiations or
made anv contract on his behalf.
-41—
Furthermore, we submit that even if it be assumed,
arguendo, first, that the citizenship requirement for ap-
plicants for membership in the Defendant Local is, as
appellant in his complaint alleges, "unreasonable, arbi-
trary, capricious and without justification," and, secondly,
that appellant was an employee in the unit of first camera-
men within the meaning of the word "employee" as used
in the Tunstall case; nevertheless. Defendant Local, not
being a "company-dominated" labor organization, in ne-
gotiating and executing a closed-shop contract, and, sub-
sequently, in refusing appellant membership, violated no
provision of the National Labor Relations Act either as it
existed prior to amendment by the Taft-Hartley Act, or
thereafter.
Membership in a labor organisation by an employee,
even though the labor organization has a closed-shop con-
tract covering the work classification in which such em-
ployee is engaged, is not a right granted by the National
Labor Relations Act. Defendant Local, as bargaining
representative, had a legal right under the National Labor
Relations Act to enter into the closed-shop contracts; De-
fendant Local, we repeat, as a labor organisation, is not,
and never has been, required under the National Labor
Relations Act to admit any person, even though he be an
employee, to membership.
The refusal of Defendant Local, as a labor organisa-
tion, to admit appellant to membership cannot be made
the basis of litigation, diversity of citizenship being ab-
sent, in the District Court below. Whether appellant has
ever had, or now has, a cause of action in the California
—42—
State Courts under the James case rule or before the Na-
tional Labor Relations Board against Defendant Local
in its capacity as a labor organisation, as distinguished
from its capacity as a bargaining representative, would be
of academic interest only, and for that reason our views
thereon are not now expressed.
On page 9 of his opening brief, appellant states that
Defendant Local was his "exclusive bargaining agent,"
that it violated his rights under the National Labor Re-
lations Act "by refusing to represent him," "by refusing
to treat him on an equal basis with all other first camera-
men in the bargaining unit, etc.," and discriminated against
him "as his unwilling representative" on wages, hours,
and conditions of employment. Again on page 25 of said
brief, appellant states that Defendant Local, "by virtue of
statute," is his "exclusive bargaining agent on wages,
hours and working conditions."
There is no semblance of support in the record for these
statements. There is no allegation in the complaint to the
effect that Defendant Local ever represented, undertook
or professed to represent appellant as his bargaining agent
or otherwise; the affirmative facts alleged in the complaint
conclusively negate any suggestion that an actual, implied,
or professed representation of appellant by Defendant
Local ever existed. The erroneous premise contained in
the above quoted statements necessarily leads appellant to
the equally erroneous conclusion that The Tunstall Case
Doctrine is applicable.
X.
Wallace Case Has No Application Because Defendant
Local Is Not a Company-Dominated Labor Or-
ganization and Appellant Was Not Employed as
a First Cameraman by Any Employer, Party to
the Closed-Shop Contracts, at the Time Such
Contracts Were Executed.
Authorities :
Wallace Corp. v. National Labor Relations Board,
323 U. S. 248, 65 S. Ct. 238, 89 L. Ed. 216;
Tenth Annual Report, National Labor Relations
Board, 57-58;
Tzvelfth Annual Report, National Labor Relations
Board, 49-50.
Finally, appellant contends that the District Court be-
low has jurisdiction under the rule of law enunciated by
the Supreme Court of the United States in Wallace Corp.
V. National Labor Relations Board, 323 U. S. 248, 65 S.
Ct. 238, 89 L. Ed. 216.
The Wallace case reached the Supreme Court of the
United States on writ of certiorari to the United States
Circuit Court of Appeals for the Fourth Circuit to review
judgments enforcing orders of the National Labor Rela-
tions Board in an unfair labor practice proceeding. Two
competing labor organizations were contending for the
right to represent the employees of the Wallace Corpora-
tion. Pursuant to an agreement, a consent election was
held and the Independent union was certified by the Board
as bargaining representative. The company then signed
a union shop contract with Independent with the knowl-
edge that Independent intended, by refusing membership
to the C. I. O. (defeated union) employees, to oust them
-44—
from their jobs. Independent thereupon refused to admit
C. I. O. men to membership and the company discharged
them. We quote from page 224, 89 L. Ed., 223 U. S.,
page 250, as follows:
"In a subsequent unfair labor practice proceeding
the Board found that (1) Independent had been set
up, maintained, and used by the petitioner" (employ-
er) ''to frustrate the threatened unionization of its
plant by the C. I. O., and (2), the union shop con-
tract was made by the company with knowledge that
Independent intended to use the contract as a means
of bringing about the discharge of former C. I. O.
employees by denying them membership in Independ-
ent. The Board held that the conduct of the company
in both these instances constituted unfair labor prac-
tices. It entered an order requiring petitioner to dis-
establish Independent, denominated by it a 'company
union' ; to cease and desist from giving effect to the
union shop contract between it and Independent; and
to reinstate with back pay forty-three employees,
found to have been discharged because of their af-
filiation with the C. I. O., and because of their failure
to belong to Independent, as required by the union
shop contract."
As appears from the foregoing, the parties aggrieved
were, at the time Independent zvas elected bargaining rep-
resentative of all the employees, and for a long time prior
thereto had been, employees of the company with which
the union shop contract was executed, and, what is far
more important, that Independent was at the time a com-
pany-dominated labor organization; in the instant case,
appellant was not an employee (first cameraman) of any
of the Hollywood Studios at the time any of the closed-
shop contracts referred to in the complaint were e:j{:ecuted.
In the Wallace case, the labor organization involved (In-
dependent) by operation of law became the bargaining-
representative of all employees, including those not hold-
ing membership, in it, and by reason of the contract which
it executed, coupled with its refusal to admit such non-
member employees into membership, deprived them of
their existing employment; in the instant case, appellant
was not an employee and Defendant Local was never his
bargaining representative by operation of law or other-
wise. Furthermore, the controlling distinction between
the Wallace case and the instant action is that in the Wal-
lace case the labor organization was company dominated,
whereas in the instant action appellant expressly alleges
that Defendant Local "is not established, maintained or
dominated by any employer" [7]. Under the National
Labor Relations Act (Wagner Act) and under its suc-
cessor, the Labor-Management Relations Act, 1947 (Taft-
Hartley Act), the right on the part of a labor organiza-
tion as the bargaining representative of employees to en-
ter into a closed-ship contract is expressly forbidden when
the labor organization is ''established, maintained or as-
sisted" by the company with which such contract is made
(Section 8(3)), National Labor Relations Act and Labor-
Management Relations Act, 1947). Where, however, the
labor organization is not "company dominated," a closed-
shop contract entered into by it is, by both Acts, specifi-
cally recognized as valid.
The meaning and effect of the Wallace case decision is
succinctly set forth in the Tenth Annual Report of the
National Labor Relations Board [57-58], from which we
quote as follows :
"Wallace Corp. v. N. L. R. B., 323 U. S. 248, de-
cided December 18, 1944. In this case the Court up-
held the Board's determination that a closed-shop con-
tract made with a company-dominated union was in-
valid and that discharges made pursuant to the con-
tract violated Section 8(3) of the Act.
"* * * The Court held that while the Act sanc-
tions closed-shop contracts^ the employer could not,
in cooperation with the union, utilize such a contract
to penalize groups of its employees because of prior
union membership without violating the provisions
of the Act which guarantee the right of self-organi-
zation and prohibit discrimination on account of the
exercise of that right.
"This is the first case under the Wagner Act
which presented the Court with an opportunity to
define the responsibilities of a collective bargaining
agent toward minority groups in the unit which un-
der the prevailing principle of majority rule it has
exclusive power to represent. The Court laid down
these principles : A collective bargaining representa-
tive selected by a majority of the employees in a unit
is the agent of all employees and must represent their
interests impartially and without discrimination; this
duty is violated where the bargaining agent enters
into a closed-shop contract with the employer with the
declared intention of denying membership to the
former adherents of a rival union in order to obtain
their disclmrge by the employer. The Court's declara-
tion in the Wallace case concerning the obligations of
a bargaining agent must be compared with its similar
holdings in the companion cases of Steele v. L. &
N. R. Co., 323 U. S. 192, and Tunstall v. Brother-
hood, 323 U. S. 210. These cases, decided con-
temporaneously with the Wallace case, involved dis-
crimination by railway labor organizations against
employees of the Negro race. The three cases, the
Court subsequently stated {Hunt v. Grnmhach, 65 S.
Ct. 1545), 'stand for the principle that a bargaining
agent owes a duty not to discriminate unfairly against
any of the group it purports to represent.' "
In the Twelfth Annual Report of the National Labor
Relations Board, pages 49-50, we find these further refer-
ences to the Wallace case as follows: "The principle an-
nounced by the Supreme Court in Wallace Corp. v. N. L.
R. B. * * * that a closed-shop proviso does not sanc-
tion the discharge of employees whom the contracting
union has expelled for the purpose of penalizing them for
their activities on behalf of a rival union, etc.," and "the
Wallace case was concerned with a closed-shop contract
made and utilized by the contracting union for the purpose
of eliminating from its membership employees who had
previously opposed it."
On pages 7 and 8 of his opening brief, appellant, ap-
parently for the purpose of endeavoring to persuade this
Court that the District Court below has jurisdiction of this
action either under The Tunstall Case Doctrine or the doc-
trine of the Wallace case — or a blend of both doctrines
concocted by appellant — quotes from the dissenting opin-
ion of Mr. Justice Jackson in Trailmobile Co. v. Whirls,
331 U. S. 40, 67-68, 67 S. Ct. 982, 995-996, 92 L. Ed.
1328, 1345. We concede that even a dissenting opinion
of such a distinguished jurist as Mr. Justice Jackson is en-
titled to great respect, but it, nevertheless, remains a dis-
senting opinion. There are, however, two phrases in the
quotation set forth by appellant which we believe sliould be
emphasized, namely, ''those who undertake to act for
others," and ''assumed to represent," appearing in the
sentence reading as follows : "Courts from time im-
memorial have held that those who undertake to act for
others are held to good faith and fair dealing and may not
favor themselves at the cost of those they have assumed
to represent." We reiterate, in order to emphasize, that
Defendant Local did not at any time "undertake to act"
for appellant and has not at any time "assumed to repre-
sent" him.
If a basis exists for charges by appellant against the
Hollywood Studios of unfair labor practices, imder the
doctrine of the Wallace case, despite the fact that Defend-
ant Local is not a "company-dominated labor organiza-
tion," that matter would be within the exclusive juris-
diction of the National Labor Relations Board; if appel-
lant is of the opinion that the factual matters alleged in
his complaint constitute unfair labor practices on the part
of Defendant Local under the Labor-Management Rela-
tions Act, 1947, it is the National Labor Relations Board,
and not District Courts of the United States, which like-
wise possesses exclusive jurisdiction thereof. {Amazon
Mills Co. V. Textile Workers Union (C. C. A. 4th, 1948),
167 F. 2d 183; Donnelly Garment Co. v. International
Ladies' Garment Workers Union, 99 F. 2d 309; Gerry of
California v. Superior Court, 32 A. C. 141, 194 P. 2d
689.)
From "prior to 1941," [6] — while appellant was still a
resident of Poland and before he had even entered the
United States [9] — and continuously down to the present
time, closed-shop contracts covering first cameramen in
the California motion picture studios have been and now
are in effect, originally "from prior to 1941 to until the
end of 1942" [6] with ASQ from "on or about January
1, 1943, to and including the date of the fihng of this
complaint" [8] with Defendant Local, and the last closed-
shop contract "was executed in writing as of January 1,
1946, for a term ending December 31, 1948," with De-
fendant Local [8].
The condition of which appellant complains existed on
and before his arrival in this country; it is thus he found
it and it has not since changed.
Conclusion.
Appellees Defendant Local and Aller respectfully sub-
mit that the judgment of the District Court should be
affirmed.
Respectfully submitted.
Bodkin, Breslin & Luddy,
Henry G. Bodkin,
George M. Breslin,
Michael G. Luddy,
Attorneys for Appellees Defendant Local and Aller.
APPENDIX A.
Love V. Chandler, 124 F. 2d 785 at 786-787:
"The appellant contends that his complaint states a
claim under Sec. 47(2) and (3) of Title 8, U. S. C.
A., authorizing actions for damages for conspiracies
to deprive citizens of the equal protection of the laws
or from exercising any right or privilege as a citizen
of the United States, and that it also states a claim
under Sec. 48 of Ttile 8, U. S. C. A., which author-
izes the recovery of damages from any person who,
having knowledge of such a conspiracy and the power
to prevent it, neglects or refuses so to do. The ap-
pellant further contends that the trial court had jur-
isdiction of the subject matter of this action by virtue
of Sec. 41(12), (13) and (14) of Title 28, U. S.
C. A., which confer upon the District Courts of the
United States jurisdiction of actions to recover dam-
ages for deprivation of rights in furtherance of such
conspiracies as are described in Sec. 47 of Title 8,
U. S. C. A.
"The trial court was of the opinion that, since this
Court had held in Love v. United States, 108 F. (2d)
43, 49, that the right of the appellant to be employed
by the Works Progress Administration was not an
absolute right conferred by the Constitution or laws
of the United States and that the District Court was
without jurisdiction to review the administrative ac-
tion of which the appellant had complained in that
case, the complaint in the instant action, under the
— 2—
rule announced in Mitchell v. Greenough, 9 Cir., 100
F. (2d) 184, certiorari denied 306 U. S. 659, 59 S.
Ct. 788, 83 L. Ed. 1056, did not state a claim for
damages resulting from a conspiracy to deprive the
appellant of any right or privilege dependent upon a
law of the United States.
"The statutes which the appellant seeks to invoke
were passed shortly after the Civil War to aid in the
enforcement of the Thirteenth Amendment prohibiting
State action the effect of which would be to abridge
the privileges or immunities of citizens of the United
States or to deprive any person of life, liberty or
property without due process or to deny any person
the equal protection of the law, and the Fifteenth
Amendment prohibiting the denial of the right to vote
on account of race or color. (Citing cases.) The
statutes were intended to provide for redress against
State action and primarily that which discriminated
against individuals within the jurisdiction of the
United States. (Citing cases.) The statutes, while
they granted protection to persons from conspiracies
to deprive them of the rights secured by the Con-
stitution and laws of the United States ( United States
V. Mosley, 238 U. S. 383, 387, 388, 35 S. Ct. 904,
59 L. Ed. 1355), did not have the effect of taking
into federal control the protection of private rights
against invasion by individuals. (Citing cases.) The
protection of such rights and redress for such wrongs
was left with the States. (Citing cases.)
— 3—
''The appellant does not seek redress because the
State of Minnesota is discriminating against him, or
because its laws fail to afford him equal protection.
We have already held that he had no absolute right
under the laws of the United States to have or retain
employment by the Works Progress Administration.
The appellant seeks damages because certain persons,
as individuals, have allegedly conspired to injure him
and have injured him by individual and concerted
action. The wrongs allegedly suffered by the appel-
lant are assault and battery, false imprisonment, and
interference with his efforts to obtain and retain em-
ployment with the Works Progress Administration.
The protection of the rights allegedly infringed and
redress for the alleged wrongs are, we think within
the exclusive province of the State. (Citing cases.)
We agree with the trial court that the appellant has
failed to state a claim upon which relief could be
granted under the statutes which he has invoked. His
complaint was properly dismissed."
APPENDIX B.
Steele v. Louisville, etc., 2>2?> U. S. 192 at 194, 89 L. Ed.
173 at 179:
"The allegations of the bill of complaint, so far as
now material, are as follows : Petitioner, a Negro, is
a locomotive fireman in the employ of respondent
railroad, suing on his own behalf and that of his
fellow employees who, like petitioner, are Negro
firemen employed by the Railroad. Respondent
Brotherhood, a labor organization, is, as provided un-
der Sec. 2, Fourth of the Railway Labor Act, the ex-
clusive bargaining representative of the craft of fire-
men employed by the Railroad and is recognized as
such by it and the members of the craft. The ma-
jority of the firemen employed by the Railroad are
white and are members of the Brotherhood, but a sub-
stantial minority are Negroes who, by the constitution
and ritual of the Brotherhood, are excluded from its
membership. As the membership of the Brotherhood
constitutes a majority of all firemen employed on re-
spondent Railroad, and as under Sec. 2, Fourth the
members because they are the majority have the right
to choose and have chosen the Brotherhood to repre-
sent the craft, petitioner and other Negro firemen on
the road have been required to accept the Brother-
hood as their representative for the purposes of the
Act.
"On March 28, 1940, the Brotherhood, purporting
to act as representative of the entire craft of fire-
— 5—
men, without informing the Negro firemen or giving
them opportunity to be heard, served a notice on re-
spondent Railroad and on twenty other railroads op-
erating principally in the southeastern part of the
United States. The notice announced the Brother-
hood's desire to amend the existing collective bargain-
ing agreement in such manner as ultimately to ex-
clude all Negro firemen from the service. By estab-
lished practice on the several railroads so notified only
white firemen can be promoted to serve as engineers,
and the notice proposed that only 'promotable,' i. e.,
white, men should be employed as firemen or assigned
to new runs or jobs or permanent vacancies in estab-
lished runs or jobs.
********
". . . On May 12, 1941, the Brotherhood en-
tered into a supplemental agreement with respondent
Railroad further controlling the seniority rights of
Negro firemen and restricting their employment. The
Negro firemen were not given notice or opportunity
to be heard with respect to either of these agreements,
which were put into effect before their existence was
disclosed to the Negro firemen.
********
". . . The Brotherhood has acted and asserts the
right to act as exclusive bargaining representative of
the firemen's craft. It is alleged that in that capacity
it is under an obligation and duty imposed by the
Act to represent the Negro firemen impartially and in
good faith; but instead, in its notice to and contracts
with the railroads, it has been hostile and disloyal to
the Negro firemen, has deliberately discriminated
against them, and has sought to deprive them of their
seniority rights and to drive them out of employment
in their craft, all in order to create a monopoly of em-
ployment for Brotherhood members.
"The labor organization chosen to be the repre-
sentative of the craft or class of employees is thus
chosen to represent all of its members, regardless of
their union af^liations or want of them."
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry Local 659, Etc., et al.,
Appellees.
Answering Brief of Appellee International Alliance of
Theatrical Stage Employes and Moving Picture
Machine Operators of the United States and
^-^^- ,FiLL.
DEC 2 3 1948
PAUL P^ O'ORSET:,
Bodkin, Breslin & Luddy, ""'"•^
Henry G. Bodkin,
George M. Breslin,
Michael G. Luddy,
1225 Citizens National Bank Building, Los Angeles 13,
Attorneys for Appellee The Alliance.
Parker & Company, Law Printers, Los Angelea. Phone TR. 5206.
TOPICAL INDEX
PAGE
Additional statement of the case 1
I.
Motion of appellee The Alliance to dismiss was properly granted
because, as appears upon the face of the complaint, it, not
being either the certified or recognized bargaining agent of
first cameramen nor a party to the closed-shop contracts in-
volved, is not a necessary or proper party defendant, and the
complaint does not state a claim against it upon which relief
can be granted 3
Conclusion 3
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry Local 659, Etc., et al..
Appellees.
Answering Brief of Appellee International Alliance of
Theatrical Stage Employes and Moving Picture
Machine Operators of the United States and
Canada.
Additional Statement of the Case.
Appellee International Alliance of Theatrical Stage Em-
employes and Moving Picture Machine Operators of the
United States and Canada, hereinafter referred to as The
Alliance, a voluntary unincorporated association, is an in-
ternational labor union and the parent organization of ap-
pellee International Photographers of the Motion Picture
Industry Local 659, etc., hereinafter called Defendant
Local. Defendant Local, an autonomous labor organiza-
tion, is chartered by The Alliance. When on August 28,
1939, as appears in Paragraph IV" of the complaint herein
— 2—
[5-6*], The Alliance was certified by the National Labor
Relations Board as the exclusive bargaining agency for
all of its members engaged in the production of motion
pictures, the work classification of first cameramen was
expressly excluded from such certification. At that time
first camermen were members of the American Society of
Cinemaphotographers (ASC) and were not members of
The Alliance or Defendant Local. It appears further from
the complaint [6-7] that until on or about December 10,
1942, the American Society of Cinemaphotographers
(ASC) was the designated representative for collective
bargaining of first cameramen, and that ever since De-
cember 10, 1942, appellee Defendant Local has, by desig-
nation, been the recognized exclusive bargaining agent of
such first cameramen. The closed-shop contracts described
in the complaint were all executed by Defendant Local;
The Alliance was not a party thereto.
It thus appears that appellee The Alliance has never at
any time been the bargaining representative of first
cameramen, and that it was not a party to any of the closed-
shop contracts which form the basis of appellant's com-
plaint.
♦Figures appearing in brackets refer, unless otherwise noted, to
pages of Transcript of Record.
— 3—
I.
Motion of Appellee The Alliance to Dismiss Was Prop-
erly Granted Because, as Appears Upon the Face
of the Complaint, It, Not Being Either the Certi-
fied or Recognized Bargaining Agent of First
Cameramen Nor a Party to the Closed-shop Con-
tracts Involved, Is Not a Necessary or Proper
Party Defendant, and the Complaint Does Not
State a Claim Against It Upon Which Relief Can
Be Granted.
Appellee The Alliance adopts as its own the answering
brief filed herein by appellees International Photographers
of the Motion Picture Industry Local 659, etc., and Her-
bert Aller.
In addition, it directs the attention of this Court to the
fact that it has never been either the certified or designated
bargaining representative of first cameramen, and was not
a party to any of the closed-shop contracts involved in this
litigation. Hence, the District Court below was without
jurisdiction, and the complaint fails to state a claim upon
which relief can be granted against The Alliance and in
favor of appellant.
Conclusion.
Appellee The Alliance respectfully submits that the judg-
ment of the District Court should be affirmed.
Respectfully submitted, ,
Bodkin, Breslin & Luddy,
Henry G. Bodkin,
George M. Breslin,
Michael G. Luddy,
Attorneys for Appellee The Alliance.
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant, •
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry, Local 659, etc., et ah,
Appellees.
REPLY BRIEF OF APPELLANT.
Henry B. Ely,
1215 Citizens National Bank Building, Los Angeles 1'3,
Attorney for Appellant.
Parker & Company, Law Printers, I-xds Angeles. Phone TR. 5206. J'^SK
TABLE OF AUTHORITIES CITED
Cases page
Betts V. Easley, 161 Kan. 459, 166 A. L. R. 342, 169 P. 2d
831 2, 4
Colonic Fibre Co. v. N. L. R. B., 163 F. 2d 65 8
Hunt V. Crumboch, 325 U. S. 821, 65 S. Ct. 1545, 89 L. Ed.
1954 4
James v. Marinship Corp., 25 Cal. 2d 721, 155 P. 2d 329 2
National Labor Relations Board v. Mylan-Sparta Co., 166 F.
2d 485 5
Oyama v. State of California, 332 U. S. 633, 68 S. Ct. 269 6
People V. Federal Land Bank, 31 Cal. 2d 871, 192 P. 2d 948.... 7
People V. Fugita, 31 Cal. 2d 872, 192 P. 2d 948 7
Stark V. Wickard, 321 U. S. 288, 64 S. Ct. 559, 88 L. Ed. 7ZZ 5
Steele v. Louisville & N. R. Co.. 65 S. Ct. 226, 323 U. S.
192 - 3, 8
Takahashi v. Fish and Game Commission, 334 U. S. 410, 68
S. Ct. 1138, 92 L. Ed. (Adv. Ops.) 1096 7
Wallace Corporation v. N. L. R. B., 323 U. S. 248, 65 S. Ct.
238, 89 L. Ed. 216 8, 9
Williams v. Int. etc. of Boilmakers, 27 Cal. 2d 586, 165 P. 2d
903 2
Statutes
Labor Management Relations Act of 1947, Title I, Sec. 101
(b), (j), (k), (1) (29 U. S. C. A., Sec. 160 (b), (j), (k)
(1)) 6
No. 11972
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
Curtis Courant,
Appellant,
vs.
International Photographers of the Motion Pic-
ture Industry, Local 659, etc., et al.,
Appellees.
REPLY BRIEF OF APPELLANT.
Introduction.
Appellees have completely failed to meet the contention
of appellant that his claim is in part founded upon Section
7 of the National Labor Relations Act, granting him the
right to join labor organizations (see App. Op. Br. pp. 2,
4, 5, 14, 36 and 43). It has been distinctly held that such
a right was granted under the National Labor Relations
Act.
"Although the shipbuilding industry may affect in-
terstate commerce and therefore may be subject to
the provisions of the National Labor Relations Act
(49 Stats. 449; 29 U. S. C. A. §§151-166), there is
nothing in the act that gives the defendant unions a
right to maintain a closed or partially closed member-
— 2—
ship together with a closed shop agreement. To the
contrary, a reasonable interpretation of the statute,
together with its underlying policy, would seem to
require that unions chosen to represent the employees
must be open to all who wish to join."
James v. Marinship Corp., 25 Cal. 2d 721, 735,
155 P. 2d 329.
*'The union defendants next contend that the trial
court did not have jurisdiction over the subject mat-
ter because, they assert, if an injunction were granted
it would in effect destroy their closed shop contract
and affect the status of the employees of the ship-
yards, and it would thus interfere with the rights of
collective bargaining granted by the National Labor
Relations Act. * =k * That act clearly does not
give a union the authority to maintain a closed shop
agreement together with an arbitrarily closed union
membership. Moreover, the rights which plaintiffs
seeks to enforce not only are consistent with the pro-
visions of the federal act but appear to be affirmative-
ly granted thereby."
Williams v. Int. etc. of Boilermakers, 27 Cal. 2d
586, 593, 165 P. 2d 903.
The same rule applies under the Railway Labor Act:
***** a union acting as the exclusive bargain-
ing agent under the law, for all employees, cannot
act arbitrarily, cannot deny equality of privilege, to
individuals or minority groups merely because mem-
bership in the organization is voluntary. To hold
otherwise would do violence to basic principles of our
American system."
Betts V. Easley, 161 Kan. 459, 166 A. L. R. 342,
351, 169 P. 2d 831.
Appellant hereinafter briefly responds to the Answering
Brief of Appellees Local 659, etc. and the numbered points
correspond to the points of Appellees in their brief.
I.
Appellant makes no contention that the ordinary fra-
ternal lodge would be subject to the limitations of our
Treaty with Poland or the Charter of the United Nations.
Appellant does contend that appellees acting as exclusive
bargaining representatives by virtue of the National Labor
Relations Act, are agencies functioning under Federal
powers and, until Congress specifically authorizes them
to violate United States treaties, they are bound by
such treaties, as would be any other governmental agency
whether State or Federal.
"We think that the Railway Labor Act imposes
upon the statutory representative of a craft at least
as exacting a duty to protect equally the interests of
members of the craft as the Constitution imposes
upon a legislature to give equal protection to the
interests of those for whom it legislates. Congress
has seen fit to clothe the bargaining representative
with powers comparable to those possessed by a legis-
lative body both to create and restrict the rights of
those whom it represents, cf. J. I. Case Co. v. Nation-
al Labor Relations Board, supra, 321 U. S. 335, 64
S. Ct. 579, but it has also imposed on the representa-
tive a corresponding duty."
Steele v. Louisville & N. R. Co., 65 S. Ct. 226, 232,
323 U. S.-192, 202.
"In the light of the history and purpose of the Act,
as construed in many decisions, the trial court's view
that the acts complained of are solely those of 'a
private association of individuals' is wholly untenable.
The acts complained of are those of an organization
acting as an agency created and functioning under
provisions of Federal law. This being true, it is
unnecessary to consider appellees' contention that the
Fifth Amendment is not here applicable because it
relates only to action by the Federal government
and not to acts of private persons."
Betts V. Easley, 161 Kan. 459, 166 A. L. R. 342,
350, 169 P, 2d 831.
11.
Appellant does not dispute the principle of law set
forth under this numbered point of the Answering Brief
of Appellees Local 659, etc., but has argued throughout
his Opening Brief that a substantial question involving
the construction and effect of Federal laws is the subject
matter of this action.
III.
The Anti-Trust laws as set forth on page 10 of the
Answering Brief of Appellees Local 659, etc., provides
that nothing "shall restrain members of such organiza-
tions from lawfully carrying out the legitimate objects
thereof." The appellant contends that the monopoly of
the appellees in excluding all non-members from their
union and not permitting them to work to prevent com-
petition is to be condemned under the Anti-Laws laws
just as much as a similar practice by an association of
business men.
Hunt V. Crumhoch, 325 U. S. 821, 65 S. Ct. 1545, 89
L. Ed. 1954, is not similar to the present case.
— 5—
IV.
Point IV of the Answering Brief of Appellees Local
659, etc., is similar to their point 11. If the National
Labor Relations Act does not regulate commerce then
many cases upholding its constitutionality must be over-
ruled. The real question again is whether substantial
rights are involved under that Act, the Treaties, and other
Acts set forth in Appellant's Opening Brief.
V.
Appellees Local 659, etc., claim under their point V
that no jurisdiction in the type of case considered was
specifically given to the Federal courts by the terms of
the National Labor Relations Act of 1935. This is
unquestionably true, but we again emphasize that we are
concerned whether any other Federal rights have been
infringed by the appellees and, if so, whether under the
case of Stark v. Wickard, 321 U. S. 288, 64 S. Ct. 559,
88 L. Ed. 7?>Z (cited in App. Op. Br. p. 44), the Federal
courts may give appropriate relief in the exercise of their
general jurisdiction.
Appellees do not claim that the National Labor Rela-
tions Board could have given appellant any administrative
relief under the National Labor Relations Act of 1935, so
therefore, the appellant is properly in the Federal court
as to that portion of his complaint occurring prior to the
effective date of the Labor Management Relations Act of
1947. This latter Act did not release or extinguish any
liabilities incurred under the original Act. A^. L. R. B. v.
Mylan-Sparta Co. ( C. C. A. 6), 166 F. 2d 485, 488.
Upon the allegations as set forth in the complaint,
the National Labor Relations Board under the Labor
Management Relations Act of 1947, has no jurisdiction
or authority to give any relief to appellant because no
overt acts tantamount to unfair practices for labor organi-
zations have been alleged by the appellant from the time
of the effective date of the Labor Management Relations
Act of 1947. Before the National Labor Relations Board
is given jurisdiction to take steps against a union under
the 1947 Act, the union must have committed an act or
practice. (Title I, Section 101 (b) (j) (k) and (1),
Labor Management Relations Act of 1947, 29 U. S. C. A.
160 (b) (j) (k) and (1).) Therefore, since no unfair
labor practice is alleged subsequent to the effective date
of the Labor Management Relations Act of 1947, the
National Labor Relations Board has no jurisdiction to
proceed against appellees and appellant has no administra-
tive remedy.
VL
Appellant has not argued in his Opening Brief that the
Civil Rights Statutes protect him in this case.
VIL
Appellant has not argued in his Opening Brief that the
California Labor Code vested jurisdiction in the District
Court.
VIIL
Whatever may be the opinion of appellees concerning
the effect of Oyama v. State of California, 332 U. S. 633,
68 S. Ct. 269, on the right of aliens ineligible to citizen-
ship to hold land, the State of California is now con-
vinced that under the Oyama case such aliens can
hold California lands, having agreed to reverse judg-
—7—
ments providing for escheat of such lands. People v.
Fugita, 31 Cal. 2d 872, 192 P. 2d 948; People v.
Federal Land Bank, 31 Cal. 2d 871, 192 P. 2d 948. Fur-
thermore, there appears no doubt today that a State
agency cannot prevent aliens ineligible to citizenship from
carrying on the common occupations of life such as fishing
in its coastal waters. Takahashi v. Fish and Game Com^
mission, 334 U. S. 410, 68 S. Ct. 1138, 92 L. Ed. (Adv.
Ops.) 1096.
Appellant has specifically alleged that the Constitution
of Appellee lATSE is unreasonable, arbitrary, capricious
and without jurisdiction [Tr. 2Z], and the Motion to
Dismiss admits all properly pleaded matters in the com-
plaint. However, all recent decisions of the Supreme
Court of the United States have struck down every at-
tempt at discrimination by such agencies as labor unions
and State agencies. If the appellees, acting under Federal
powers, were specifically authorized by Congress to ex-
clude aliens, an entirely different question might be in-
volved. No such authorization appears and it is just as
unthinkable for the appellees to discriminate because of
citizenship as for any Governmental agency to do so
when not specifically authorized by Congressional au-
thority. I
IX.
It appears to appellant that appellees have misinterpreted
the various cases setting forth the duties of collective
bargaining agencies who are the exclusive representatives
of all employees under the National Labor Relations Act.
Appellees having undertaken to act for a majority of the
members of the craft are required, even against their own
will, to act on behalf of all.
"So long as a labor union assumes to act as the
statutory representative of a craft, it cannot rightly
refuse to perform the duty, which is inseparable from
the power of representation conferred upon it, to
represent the entire membership of the craft."
Steele v. Louisville & N. R. Co., 323 U. S. 192, 204,
65 S. Ct. 226, 233.
Other cases setting forth the principle that the union
as exclusive bargaining representative must act on behalf
of all in the craft are referred to in pages 14 through 27
of Appellant's Opening Brief.
X.
Appellees contend under point X of their Answering
Brief that the doctrine set forth in Wallace Corporation
V. N. L. R. B., 323 U. S. 248, 65 S. Ct. 238, 89 L. Ed.
216, is confined to company dominated unions. Numerous
cases decided by the Federal and State courts have not so
limited the Wallace case. A recent case is Colonic Fibre
Co. V. N. L. R. B.iC.C.A.2), 163 F. 2d 65, where an
A. F. of L. union not dominated by the employer caused
the discharge of an employee because of his failure to
maintain membership in that union.
The second part of this point of appellees is that appel-
lant was not an employee at the time the closed shop
contracts were entered into. Appellees state:
"The condition of which appellant complains
existed on and before his arrival in this country;
it is thus he found it and it has not since changed."
(Answering Brief of Appellees, page 49.)
We believe this point is answered by the following
quotation in the Wallace case:
"The duties of a bargaining agent selected under
the terms of the Act extend beyond the mere repre-
sentation of the interests of its own group members.
By its selection as bargaining representative, it has
become the agent of all the employees, charged with
the responsibility of representing their interests fairly
and impartially. Otherwise, employees who are not
members of a selected union at the time it is chosen
by the majority would be left without adequate repre-
sentation."
Wallace Corporation v. N. L. R. B., 323 U. S. 248,
255, 256, 65 S. Ct. 238, 241, 242.
Respectfully submitted,
Henry B. Ely,
Attorney for Appellant.
No. 11973
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. SIMMONS,
Appellant,
vs
HARRY C. WESTOVER, Collector of Internal Revenue,
Appellee.
TRANSCRIPT OF RECORD
Upon Appeal From the District Court of the United States
for the Southern District of California
Central Division
AUG 2 8 1948
PAUL P. O'BRIEN,
OLKRfC
Parker & Company, Law Printers, Los Angeles. Phone TR. 5206.
No. 11973
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. SIMMONS,
Appellant,
vs
HARRY C. WESTOVER, Collector of Internal Revenue,
Appellee.
TRANSCRIPT OF RECORD
Upon Appeal From the District Court of the United States
for the Southern District of California
Central Division
Parker & Company, Law Printers, Los Angeles. Phone TR. 5206.
INDEX.
[Clerk's Note : When deemed likely to be of an important nature,
errors or doubtful matters appearing in the original certified record are
printed literally in italics ; and likewise, cancelled matter appearing in the
original certified record is printed and cancelled herein accordingly. When
possible an omission from the text is indicated by printing in italics the
two words between which the omission seems to occur.]
Page
Answer 7
Appeal :
Designation of Record on, (Circuit Court) 103
Notice of 75
Certificate of Clerk 76
Complaint for Refund of Income Taxes 2
Exhibit A. Claim for Refund 4
Designation of Record on Appeal (Circuit Court) 103
Findings of Fact and Conclusions of Law 68
Judgment 74
Minute Order of March 3, 1948, Amending Opinion.... 67
Names and Addresses of Attorneys 1
Notice of Appeal 75
Opinion 41
Reporter's Transcript of Proceedings 17
Testimony on Behalf of Plaintiffs:
Simmons, E. C. —
Direct examination 85
Statement of Points and Designation of Parts of Rec-
ord to Be Printed (Circuit Court) 103
Stipulation and Order Amending Stipulation of Facts . 40
Page
Stipulation of Facts 11
Exhibit A-1. Offer in Compromise on Treasury-
Department Form 656, Executed August 1, 1932.. 18
Exhibit A-2. Reverse Side of Form 656, Executed
August 6, 1932 22
Exhibit A-3. Letter of E. C. Simmons to Commis-
sioner of Internal Revenue, Dated July 20, 1932.... 24
Exhibit A-4. Statement of Assets and Liabilities
of E. C. Simmons, Submitted With Letter of July
20, 1932 26
Exhibit B. Commissioner's Letter of October 18,
1932, Rejecting Offer of Compromise 28
Exhibit C. Tax Collection Waiver, Executed July
5, 1933 29
Exhibit D-1. Offer in Compromise on Treasury
Department Form 656, Executed May 6, 1936 30
Exhibit D-2. Reverse Side of Form 656, Executed
May 6, 1936 34
Exhibit D-3. Statement of 1925 Income Tax of E.
C. Simmons 36
Exhibit D-4. Financial Statement of E. C. Sim-
mons Dated April 30, 1936 37
Exhibit D-5. Tax Collection Waiver, Dated July
5, 1933 38
Exhibit 6. Letter of Acting Commissioner of In-
ternal Revenue to E. C. Simmons, Dated April
9, 1938 38
NAMES AND ADDRESSES OF ATTORNEYS
For Appellant:
LATHAM & WATKINS
1112 Title Guarantee Building
411 West Fifth Street
Los Angeles 13, Calif.
For Appellee:
JAMES M. CARTER
United States Attorney
E. H. MITCHELL
GEORGE M. BRYANT
Assistants U. S. Attorney
EUGENE HARPOLE
Special Attorney, Bureau of Internal Revenue
600 U. S. Post Office and Court House
Los Angeles 12, Calif. [1*]
*Page numher appearing at foot of Certified Transcript.
2 E. C. Simmons vs.
In the District Court of the United States
In and For the Southern District of California
Central Division
No. 5517-W Civil
E. C. SIMMONS,
Plaintiff,
V.
HARRY C. WESTOVER, Collector of Internal Revenue,
Defendant.
COMPLAINT FOR REFUND OF INCOME TAXES
PAID
Plaintiff, E. C. Simmons, by Latham & Watkins, his
attorneys, presents this, his Complaint against the defend-
ant herein, and for cause of action alleges as follows :
I.
Plaintiff, E. C. Simmons, resides at Beverly Hills, in
the County of Los Angeles, State of California.
11.
Defendant, Henry C. Westover, was, on and subsequent
to November 14, 1945, and still is, the duly appointed and
acting Collector of Internal Revenue of the United States
for the 6th District of California.
III.
This is a suit filed pursuant to the provisions of Section
24(20) of the Judicial Code as amended (28 U. S. C. A.,
Sec. 41(20), [2] for the recovery of Federal income taxes
erroneously and illegally collected from the plaintiff for
the calendar year 1925 in the amount of $1,255.18 and
interest erroneously and illegally collected therewith in the
Harry C. Westovcr, etc. 3
amount of $1,904.09, together with interest on the total
amount of $3,159.27.
IV.
On or about June 5, 1929, the plaintiff executed an
"Agreement as to Final Determination of Tax Liability"
for the years 1925, 1926, and 1927 in the principal sum
of $8,869.72 and agreed to the assessment of any defi-
ciency included therein, and on or about October 23, 1929,
said agreement was approved and accepted by the Com-
missioner of Internal Revenue. Of said principal sum,
there remained unpaid from and after August 15, 1933, a
balance of $1,255.18.
V.
On or about November 14, 1945, plaintiff paid to the
defendant herein, in response to said defendant's notice
and demand therefor, said balance of, $1,255.18, together
with interest in the amount of $1,904.09, or a total of
$3,159.27.
VI.
More than six (6) years had elapsed between the date
of the assessment mentioned in paragraph TV and the
date of payment mentioned in paragraph V, to wit : more
than sixteen (16) years.
VII.
The collection of said tax and interest was barred after
six years from the date of said assessment pursuant to
the provisions of Section 276(c) of the Internal Re\cnue
Code (26 U. S. C. A., Sec. 276(c)).
VIII.
On December 11, 1945, plaintiff filed with the defend-
ant, as Collector of Internal Revenue, at Los Angeles,
4 E. C. Simmons vs.
California, a claim for refund in the amount of $3,159.27,
plus interest, [3] representing the tax and interest paid
by him as alleged in paragraph V for said year 1925. A
true copy of said claim and of the statement attached
thereto is hereto attached, marked "Exhibit A" and is by
reference made part of this Complaint.
IX.
More than six (6) months have elapsed since the filing
of said claim and no decision ha^ been rendered thereon.
Wherefore, plaintiff prays that a judgment may be
entered herein in favor of the plaintiff and against the
defendant for $3,159.27, plus interest thereon, from No-
vember 14, 1945, at 6% per annum, together with costs
of suit, and for such other and further relief as to the
Court may seem proper.
LATHAM & WATKINS
By Richard W. Lund
Attorneys for Plaintiff
1112 Title Guarantee Building
Los Angeles 13, California [4]
[Verified.]
"EXHIBIT A"
Form 843
Treasury Department
Internal Revenue Service
(Revised April 1940)
CLAIM
To Bq Filed With the Collector Where Assessment Was
Made or Tax Paid
Collector's Stamp
(Date received)
Harry C. Westover, etc. 5
The Collector will indicate in the block below the kind
of claim filed, and fill in the certificate on the reverse side.
□ Refund of Tax Illegally Collected.
I I Refund of Amount Paid for Stamps Unused, or Used
in Error or Excess.
I I Abatement of Tax Assessed (not applicable to estate
or income taxes).
State of California
County of Los Angeles — ss:
[Type or Print] Name of taxpayer or purchaser of
stamps E. C. Simmons.
Business address 540 North La Brea Avenue, Los
(Street)
Angeles 2>6, California.
(City) (State)
Residence
The deponent, being duly sworn according to law, de-
poses and says that this statement is made on behalf of
the taxpayer named, and that the facts given below are
true and complete:
L District in which return (if any) was filed Sixth
California.
2. Period (if for income tax, make separate form for
each taxable year) from January 1, 1925, to Decem-
ber 31, 1925.
3. Character of assessment or tax — Income tax and in-
terest thereon.
4. Amount of assessment, $3,159.27; dates of payment
November 14, 1945.
5. Date stamps were purchased from the Government--..
6. Amount to be refunded $3,159.27.
6 E. C. Simmons vs.
7. Amount to be abated (not applicable to income or
estate taxes) $
8. The time within which this claim may be legally filed
expires, under Section 322(b)(1) of the Internal
Revenue Code on November 14, 1947.
The deponent verily believes that this claim should be
allowed for the following reasons:
See statement attached. [5]
E. C. SIMMONS
CLAIM FOR REFUND
On November 14, 1945, the taxpayer paid, under pro-
test, to the Collector of Internal Revenue at Los Angeles,
California, in response to a demand therefor, additional
income taxes for the calendar year 1925 in the amount of
$1,255.18 together with interest thereon in the amount of
$1,904.09, or a total of $3,159.27.
Said tax and interest was not collected within six years
after assessment nor within a reasonable time after the
rejection of taxpayer's ofifer in compromise filed in 1933
at which time he agreed that the tax might be collected
by distraint or by a proceeding in court begun at any
time.
The collection of said tax and interest was, therefore,
barred by the provisions of Section 276(c), I. R. C, and
the payment made constitutes an overpayment as defined
by Section 3770(a)(2), I. R. C.
Accordingly, said payment is to be refunded to the
taxpayer and, for that/ purpose, this claim is filed.
[Endorsed] : Filed Jun. 27, 1946. Edmund L. Smith,
Clerk. [6]
Harry C. Westovcr, etc. 7
[Title of District Court and Cause]
ANSWER
The defendant in answer to plaintiff's complaint herein
admits, denies and alleges:
I.
Admits the allegations contained in Paragraph I there-
of.
II.
Admits the allegations contained in Paragraph II there-
of.
III.
Admits the allegations contained in Paragraph III there-
of, except that it is denied that the collection of the taxes
and interest involved was erroneous or illegal.
IV.
Admits the allegations contained in Paragraph IV of
the complaint.
V.
Admits the allegations contained in Paragraph V of the
complaint.
VI.
No answer is made to Paragraph VI thereof since
Paragraph IV, to which [7] reference is made in Para-
graph VI, does not mention an assessment made but only
an agreement that an assessment may be made in the
future.
VII.
Denies the allegations contained in Paragraph VTT of
the complaint, and alleges that in and by the "Agreement
as to Final Determination of Tax Liability" executed be-
tween the plaintiff and the Government as alleged in Para-
8 E. C. Simmons vs.
graph IV of the complaint, the plaintiff agreed to a de-
ficiency in his income tax for the year 1925 in the amount
of $5,281.66; that pursuant to the Agreement, income
taxes in the amount of $5,281.66 were assessed against
the plaintiff on October 19, 1929, together with interest
thereon in the amount of $1,053.36, a total of $6,335.02
for the year 1925 ; that pursuant to the Agreement, the
Commissioner of Internal Revenue determined overassess-
ments for 1926 of $795.45 and for 1927 of $2,067.57, and
that such overassessments were, with the consent of the
plaintiff, credited against the deficiency for 1925, leaving
an' outstanding balance of $3,472.06 ; that thereafter pay-
ments were made by plaintiff during the period 1930-
1934, which reduced the balance to $1,255.18; that on
August 15, 1932, plaintiff filed an offer in compromise
(Form 656) with the Collector of Internal Revenue at
Los Angeles, California, in the amount of $250, payable
in instalments, alleging that he was unable to raise funds
and representing that he was insolvent; that such offer
contained a specific provision that —
* * * the taxpayer hereby expressly waives —
2. The benefit of any statute of limitations affect-
ing the collection of the liability sought to be com-
promised, and in the event of the rejection of the
offer, expressly consents to the extension of any
statute of limitations affecting the collection of the
liability sought to be compromised by the period of
time (not to exceed two years) elapsed between the
date of the filing of this offer and the date on which
final action thereon is taken.
that the offer was rejected by the Commissioner by letter
dated October 18, 1932; that under date of July 5, 1933,
Harry C. Westovcr, etc. 9
the plaintiff executed a Tax Collection Waiver which
provided! as follows: [8]
It is hereby agreed by and between E. C. Simmons
of Los Angeles, party of the first part, and the Com-
missioner of Internal Revenue, party of the second
part, that the amount of $3,472.06, representing an
assessment of Income tax for the year 1925 made
against the said party of the first part, appearing on
the Nov. 590046-1929 assessment list, page , line
, for the Sixth District of California, may be
collected (together with such interest, penalties or
other additions as are provided for by law) from said
party of the first part by distraint or by a proceeding
in court begun at any time.
that the Waiver was executed by the Commissioner under
date of March 15, 1934; that on May 21, 1936, the plain-
tiff filed another offer in compromise on Form 656 with
the Collector of Internal Revenue at Los Angeles, alleg-
ing inability to pay; that this second offer shows as the
'Total amount" $2,316.88, but that it is in reality an
offer of $100, since the offer shows the amount of $2,-
316.88 as consisting of $100 in cash and $2,216.88 pre-
viously paid on account of the tax liability; that this offer
contains the specific provision that —
* * * the proponent hereby expressly waives :
^C «lf '^ ^2 >!' ^ ^ Jf
2. The benefit of any statute of limitations ap-
plicable to the assessment and/or collection of the
liability sought to be compromised, and agrees to the
suspension of the running of the statutory ])er4od of
limitations on assessment and/or collection for the
period during which this offer is pending and for one
vear thereafter.
10 E. C. Simmons vs.
that this offer was rejected by letter dated August 9,
1938; that the plaintiff has never given any notice to the
Commissioner that the plaintiff would, treat the Tax Col-
lection Waiver as at an end after a reasonable time or at
any other time, and that the Tax Collection Waiver re-
mains in full force and effect, and that the collection of
the tax in question was not barred when such tax was
collected from the plaintiff.
VIII.
Admits the allegations contained in Paragraph VIII of
the complaint; denies the allegations contained in the claim
for refund except as similar [9] allegations are admitted
in this answer.
IX.
Admits the allegations contained in Paragraph IX of
the complaint.
Wherefore, defendant prays that plaintiff take nothing
by his complaint herein, and that the same be dismissed
and that defendant recover his costs in this behalf ex-
pended.
JAMES M. CARTER
United States Attorney
E. H. MITCHELL and
GEORGE M. BRYANT
Assistant U. S. Attorneys
EUGENE HARPOLE, Special Attorney,
Bureau of Internal Revenue
By George M. Bryant
Attorneys for Defendant [10]
[Affidavit of Service by Mail]
[Endorsed] : Filed Aug. 27, 1946. Edmund L. Smith,
Clerk. [11]
Harry C. Westovcr, etc. 11
[Title of District Court and Cause]
STIPULATION OF FACTS
It Is Hereby Stipulated and Agreed by and between the
parties to the above-entitled action, acting through their
respective attorneys, that the following facts are true :
I.
This action involves an alleged overpayment of Federal
income taxes for the calendar year 1925.
IT.
The plaintiff is an individual residing at Beverly Hills,
California, and the defendant is and has been since prior
to November 14, 1945, the duly appointed and Acting
Collector of Internal Revenue of the United States for
the Sixth District of California.
III.
On or about June 5, 1929, plaintiff executed an "Agree-
ment as to Final Determination of Tax Liability" fixing
the amounts of his income tax liability with respect to
the years 1925, 1926 and 1927, which [12] agreement was
subsequently approved and accepted by the Commissioner
of Internal Revenue.
IV.
On or about October 19, 1929, pursuant to the above
''Agreement as to Final Determination of Tax Liability,"
there were assessed against the plaintiff income taxes for
the year 1925 in the amount of $5,281.66, together with
interest thereon in the amount of $1,053.36. a total of
$6,335.02, against which were credited overassessnicnts
for the years 1926 and 1927 in the amounts of $795.45
and $2,067.51 respectively, leaving a balance due of
$3,472.06. The Commissioner of Internal Revenue sent
12 E. C. Simmons vs.
the assessment list containing the foregoing assessment
to the Collector of Internal Revenue for the First District
of Texas and such Collector received said list on or about
November 1, 1929. The foregoing Collector issued against
plaintiff a first notice and demand on November 4, 1929,
and a second notice and demand with respect to the fore-
going liabilities on November 18, 1929. Due to the plain-
tiff's removal from the First District of Texas to the
Sixth District of California, the account for the above
income tax liabilities was transferred from the Collector
for the First District of Texas to the Collector of Internal
Revenue for the Sixth District of California. The Col-
lector for the district last mentioned issued a warrant of
distraint with respect to the above liabilities on December
17, 1929, and on December 19, 1929, such Collector filed
with the Recorder of Los Angeles County, California, a
notice of lien with respect to plaintiff's above income tax
liabilities.
V.
From October 19, 1929 to and including August 15,
1933, plaintiff made certain payments on said outstanding
balance, which reduced said balance of $3,472.06 to a bal-
ance as of August 15, 1933 of $1,255.18, exclusive of and
not counting interest accruing subsequent to the above
assessment on or about October 19, 1929. [13]
VI.
On August 1, 1932, plaintiff executed an "Offer in
Compromise" on Treasury Department Form 656 and
this offer was filed with the Collector of Internal Revenue
at Los Angeles, California, on August 15, 1932. The
above Form 656 is a form with printed matter on both
the face and the reverse side thereof. Attached hereto
Harry C. Westovcr, etc. 13
and incorporated herein by reference, is a photostatic copy
of the face of the above Form 656, which has been marked
Exhibit A-1. Said Exhibit shows that it was executed
by plaintiff on August 1, 1932, and that on August 25,
1932 the Commissioner of Internal Revenue, by his duly
authorized agent, signed en the face of the above offer
with respect to the following language appearing thereon:
"Waiver of Statute of Limitations is hereby accepted,
and Offer will be considered and acted upon in due course."
VII.
Attached hereto and incorporated herein by reference
is a photostatic copy of the reverse side of the above Form
656, which has been marked Exhibit A-2. Said exhibit
represents the Collector's recommendation and report to
the Commissioner of Internal Revenue as of August 25,
1932, respecting the offer set forth on Exhibit A-1. Ex-
hibit A-2 was executed by the Collector of Internal
Revenue for the Sixth District of California on August
25, 1932, and then transmitted to the Commissioner of
Internal Revenue in due course.
VIII.
Attached hereto and incorporated herein by reference
is a photostatic copy of plaintiff's July 20, 1932 letter to
the Commissioner of Internal Revenue, which has been
marked Exhibit A-3. Attached hereto and incorporated
herein by reference is a photostatic copy of a statement
of assets and liabilities which plaintiff submitted with his
above letter of July 20, 1932. The foregoing statement
has been marked Exhibit A-4. Plaintiff attached Exhibit
A-3 and Exhibit A-4 to his above August 1, 1932 Offer
in Compromise when he submitted the same to the Com-
missioner of Internal Revenue. [14]
14 E. C. Simmons vs.
IX.
On October 18, 1932, the Commissioner of Internal
Revenue wrote the plaintiff rejecting the above Offer in
Compromise. Attached hereto, incorporated herein by
reference and marked Exhibit B is a copy of the Com-
missioner's October 18, 1932 letter of rejection to the
plaintiff.
X.
Between the above date of October 18, 1932, and the
hereinafter mentioned date of May 6, 1936, there was no
Offer in Compromise pending before the Bureau of In-
ternal Revenue with respect to the above income tax lia-
bilities. On July 5, 1933, plaintiff executed a tax collec-
tion waiver with respect to his above income tax liabilities
for the year 1925 and on March 5, 1934, the Commission-
er of Internal Revenue, bv his duly authorized agent, ac-
cepted the said waiver executed by plaintiff on July 5,
1933. This waiver was not submitted in connection with
any Offer in Compromise. Attached hereto, incorporated
herein by reference and marked Exhibit C is a photostatic
copy of the above tax collection waiver showing execution
thereof by the plaintiff on July 5, 1933 and execution
thereof by the Commissioner of Internal Revenue on
March 5, 1934.
XL
On May 6, 1936, plaintifT executed an Offer in Com-
promise on Treasury Department Form 656 and this
offer was filed with the Collector of Internal Revenue at
Los Angeles, Cahfornia, on May 21, 1936. The above
Form 656 is a form with printed matter on both the face
and the reverse side thereof. Attached hereto and in-
corporated herein by reference is a photostatic copy of
the face of the above Form 656, which has been marked
Harry C. West over, etc. 15
Exhibit D-1. Said exhibit shows that it was executed by
plaintiff on May 6, 1936, and that on May 29, 1936, the
Commissioner of Internal Revenue, by his duly authorized
agent, signed on the face of the above offer with respect
to the following language appearing thereon: "Waiver
of statutory period of limitations is hereby accepted, and
offer will be considered and [15] acted upon in due
course."
XII.
Attached hereto and incorporated herein by reference
is a photostatic copy of the reverse side of the above
Form 656, which has been marked Exhibit D-2. Said
Exhibit represents the Collector's recommendation and
report to the Commissioner of Internal Revenue as of
May 29, 1936, respecting the offer set forth on Exhibit
D-1. Exhibit D-2 was executed by the Collector of In-
ternal Revenue for the Sixth District of California on
May 29, 1936, and then transmitted to the Conmiissioner
of Internal Revenue in due course.
XIII.
Attached hereto and incorporated herein by reference is
a photostatic copy of "Statement of 1925 income tax of
E. C. Simmons" which has been marked Exhibit D-3.
Attached hereto and incorporated herein by reference is
a photostatic copy of a "Financial Statement of E. C.
Simmons," which has been marked Exhibit D-4. Exhibits
D-3 and D-4 were prepared by plaintiff and submitted by
him in connection with his above Offer in Compromise
executed on May 6, 1936.
XIV.
Attached hereto and incorporated herein by reference
is a photostatic copy of the copy of the "Tax Collection
Waiver" executed by plaintiff on July 5, 1933, which
16 E. C. Simmons vs.
photostatic copy has been marked Exhibit D-5. The above
Exhibit D-2 reads in part as follows: "Were any col-
lection waivers filed? . . . Yes ... If so, furnish
copies . . . attached . . .". Exhibit D-5 represents
the collection waiver referred to in the above answer of
"Yes" and such exhibit represents the copy of a collection
waiver, which the Collector of Internal Revenue for the
Sixth District of California "attached" when forwarding
to the Commissioner of Internal Revenue (see Exhibit
D-2) plaintiff's offer in Compromise executed on May
6, 1936, (see Exhibit D-1). Exhibit D-5 is a copy of
plaintiff's original "Tax Collection Waiver" which he
executed on July 5, 1933. (See Exhibit C hereto.) [16]
XV.
Attached hereto, marked Exhibit E and incorporated
herein by reference, is a copy of the August 9, 1938 let-
ter from the Acting Commissioner of Internal Revenue
to the plaintiff whereby the Government rejected plain-
tiff's above Offer in Compromise executed on May 6,
1936. Plaintiff submitted no further Offers in Compro-
mise and subsequent to the date of August 9, 1938, no
Offer in Compromise from the plaintiff was pending or
under consideration by the Bureau of Internal Revenue.
XVI.
On or about October 9, 1945, one of the Deputies from
the Office of the Collector of Internal Revenue for the
Sixth District of California personally called upon and
made a demand of plaintiff with respect to the income tax
liabilities hereinbefore mentioned. The plaintiff on No-
vember 14, 1945, paid to the defendant herein the above
balance of $1,255.18 (see paragraph V hereof) together
with interest in the amount of $1,904.09, or a total of
$3,159.27. In addition to the figure last mentioned plain-
tiff paid the sum of fifty cents as the fee for obtaining
Harry C. We stover, etc. 17
the release with respect to the Hen, which had been created
as set forth in paragraph IV hereof.
XVII.
No notice with respect to revoking the above ''Tax
Collection Waiver" executed by plaintiff on July 5, 1933,
and accepted by the Commissioner of Internal Revenue on
March 5, 1934, was given unless plaintiff's above offer in
compromise executed on May 6, 1936, and filed with the
Collector of Internal Revenue on May 21, 1936, consti-
tuted such notice.
XVIII.
- Eith e r party hereto may art the time ef trial of writing
briefs herein e^ aft¥ other time question the relevancy
aftd /of materiality ef any ef the facto of exhibits herein
stipulated. It '^ further agreed th*t this stipulation el
facts shall fiet prejudice the right e# either [17] party
hereto to introduce such other arftd additional evidence as
is ftet inconsistent \vith of contrary to the facts herein
stipulated. [LPO H.C.D.]
Dated this 5th day of February, 1947.
LATHAM & WATKINS
By Henry C. Diehl
Attorneys for Plaintiff
JAMES M. CARTER
United States Attorney
E. H. MITCHELL and
GEORGE M. BRYANT
Asst. United States Attorneys
EUGENE HARPOLE and
LOREN P. OAKES
Special Attorneys
Bureau of Internal Revenue
By Loren P. Oakes
Attorneys for Defendant [18]
18 E. C. Simmons vs.
EXHIBIT A-1
Form 656 — Revised March, 1929
Treasury Department
Internal Revenue Service
OFFER IN COMPROMISE
To be filed with collector for your district
Forms to be submitted in duplicate
For Use of Collector
Class of tax Income.
Special deposit
account No. 14624.
Serial No. 217.
Amount paid, $25 —
(Cashier's stamp)
Certified Check. Cash. M. O.
E. C. Simmons
(Name of taxpayer)
848 S. Oxford, Los Angeles, California
(Address of taxpayer)
Date— July 20, 1932
Commissioner of Internal Revenue:
Through the Collector of Internal Revenue at Los
Angeles, Cal.
Sir:
The following offer in compromise is submitted to you
by the undersigned:
Charges of violation e4 lfH\^ of failure to meet an in-
ternal revenue obligation have been made against the tax-
Harry C. West over, etc. 19
payer named above as follows : failure to pay I. T, for
1925 amount of $1330.18 and interest.
(State specifically the pending charge and/or
kind of tax and period involved)
Received in
Sep. 3, 1932
General Counsel's Office
Bureau of Internal Revenue
ADMC
Received With Remittance
6th District of California
Aug. 15, 1932
Los Angeles Office
O. G. S.
Date and place of alleged violation
The alleged violation or failure is due to the following
cause or causes: inability to raise sufficient funds with
(State in detail)
which to make payment.
$25 paid herewith and balance $25 monthly.
The sum of $250.00 is hereby tendered voluntarily with
request that it be accepted as a compromise offer and that
release be granted the undersigned from the following
liability resulting from the violation or failure specified:
1925 income tax in amount of $1330.18 with accrued
interest.
The following facts and reasons are submitted as
grounds for acceptance of the ofifer : insolvent, see state-
ment attached.
(If space provided is insufficient, attach supplemental
affidavit and supporting evidence)
20 E. C. Simmons vs.
It is understood that this offer does not afford relief
from the Hability incurred unless and until it is actually
accepted by the Commissioner with the advice and consent
of the Secretary of the Treasury, and for cases in suit
with the recommendation of the Attorney General of the
United States, costs, if any, to be paid by the undersigned.
In making this offer, and as a part of the consideration
thereof, the taxpayer hereby expressly agrees that all
payments and other credits heretofore made to the ac-
count (s) for the year(s) under consideration, for which
an unpaid liability exists, shall be retained by the United
States, and, in addition, the taxpayer hereby expressly
waives —
1. Any and all claims to refunds or overpayments to
which he may be entitled under the internal revenue laws
for any years, calendar or hscal, or any period fixed by
law, expiring prior to the date of acceptance of the offer,
due through overpayment of any tax, interest, or penalty,
or interest on overpayments or otherwise, as is not in ex-
cess of the difference between the tax liability sought to be
compromised herewith and the amount herein offered, and
agrees that the United States may retain such refunds or
overpayments, if any.
2. The benefit of any statute of limitations affecting
the collection of the liability sought to be compromised,
and in the event of the rejection of the offer, expressly
consents to the extension of any statute of limitations
affecting the collection of the liability sought to be com-
promised by the period of time (not to exceed two years)
Harry C. West over, etc. 21
elapsed between the date of the filing of this offer and
the date on which final action thereon is taken.
(If offer is made by agent, the reason therefor
must be stated on this line)
E. C. Simmons
(Signature of taxpayer or agent)
Sworn and subscribed before me this 1st day of Aug.,
1932.
B. E. Northing
(Signature of officer administering oath)
Waiver of statute of limitations is hereby accepted, and
offer will be considered and acted upon in due course.
Commissioner of Internal Revenue
By
Chief Office Deputy
Collector of Internal Revenue [19]
22
E. C. Simmons vs.
EXHIBIT A-2
COLLECTOR'S RECOMMENDATION
Commissioner of Internal Revenue, Washington, D. C. :
Herewith is an offer made by E. C. Simmons, 848
South Oxford St., Los Angeles, Cal. in compromise of
liability incurred because Inability to make further pay-
ments on 1925 income tax liability.
Return was filed on Form for 1925 on
(Period) (Date)
This case is (not) in suit. Tax assessed in Commissioner
in First District of Texas.
Record of Assessments and Payments
Entries in detail to be made by the Collector. Show in
the tenth column by symbols "Pd.," "Ab.," or "Cr./' the
nature of each entry in eighth column.
Kind of
Assessment,
Account N
D.
Tax, Penalty,
List
Year
Month
or
Amount Assessed
Interest and
Page Line
Taxable Year
Inc Tax
1929
1925
Nov
590046
5281 66
Int to 7/12/29
«
1053 Z6
6335 02
Paid, Aba
Date
ted or Credited
Amount
2862 96
Balance Due
AL,' 1 Schedule
^^ j Number
10/31/29
Credit 1st Texas
1/ 3/30
24188
Paid
8/29/30
250 00
<
3/19/31
250 00
1
4/19/31
250 00
<
6/23/31
250 00
i(
8/20/31
150 00
<
9/22/31
150 00
'
10/20/31
150 00
<
11/23/31
150 00
i
12/20/31
150 00
c
1/20/32
150 00
(
5004 84
1330 18
Harry C. Westovcr, etc. 23
[STAMPED] :
THIS FORM 656
FOR MEMORANDUM PURPOSES ONLY
OFFER REJECTED 10-18-32
REJECTION SCHEDULE (DATE) 10-27-32
Compromise Offer
Amount of previous tender ($25.00 herewith)
Balance $25.00 monthly.
Amount of this tender Tentative $250.00
Total amount offered 250.00
Demands Issued
Form 7658 Date 11/ 4/29 1st Texas
7659 11/18/29 "
69 12/17/29 6th Calif.
Was a notice of lien filed ? Yes 6th District of California
Los Angeles County Dec. 19, 1929.
(If so, when and where)
Was a bond for collection filed? No.
(If so, furnish copy of same)
Was a collection waiver filed? No.
(If so, furnish copy of same)
I recommend that the offer be for the
(Accepted or rejected)
following reasons (state same in full) :
Being investigated under the provisions of mimeograph
#3832.
Date signed , 19
Collector 6th District of California. [20]
24 E. C. Simmons vs.
EXHIBIT A-3
Los Angeles, California,
July 20, 1932.
Taxpayer :
E. C. Simmons
808 S. Oxford
Los Angeles, Cal.
Commissioner of Internal Revenue
Through Collector of Internal
Revenue at Los Angeles
Sir:
In connection with attached offer of compromise there
is submitted for your consideration:
Additional tax of $3472.06 became payable at time when
my cash position made it impossible to make payment in
lump sum. Under an installment arrangement I have
paid a total of $2141.88, leaving a balance, as of July 8,
of $2143.42, interest amounting to $813.24, and tax of
$1330.18. The last payment, of $150.00, was made on
January 20, 1932. Since that time my financial condi-
tion steadily has grown worse, due to successive cuts of
salary.
As financial editor of Los Angeles Evening Herald and
Express I receive $180 weekly, my sole income. From
this I pay $216 monthly to an assistant and $100 monthly
to my mother on an old indebtedness. Apartment rent,
Harry C. Westovcr, etc. 25
household expenses, apparel, doctors and other necessary
family expenses aggregate $385 a month.
In order to hold my position it is necessary that I main-
tain a standard of living far beyond what otherwise would
be justified by my income. I must keep in touch with
important people, on a fairly equal footing and do a
minimum amount of entertaining, at whatever sacrifice,
since my present employment is the direct result of contacts
made with my employers before financial troubles multi-
plied ; and I feel quite sure my term would be short indeed
once it were known that I am actually bankrupt.
My life insurance premiums average $250 monthly.
These I have managed to keep up by exhausting the loan
value of the policies, which will be in default before the
end of the current year — something of a calamity since I
have lately been pronounced uninsurable.
Prior to the depression I was engaged in the stock
brokerage business in Los Angeles. I was caught in the
crash. Value of my holdings diminished. I hung on,
hoping for a turn of the tide, until I had neither business
nor securities.
On page following appears statement of assets and
liabilities as of above date, showing an excess of liabilities
over assets of $32,283.35^.
E. C. Simmons [21]
26 E. C. Simmons vs.
EXHIBIT A-4
ASSETS
Current
Cost Value
500 shares Builders' Incorpo-
rated Mortgages aggregat-
ing more than $60,000 and
taxes of more than $6,000
in default. $ 50,000.00 nil
5000 shares of Exchange Pub-
lishing Co. Corporation in-
active; assets nil unsatis-
fied judgments outstanding
for some $290. 50,000.00 nil
50 shares Nash-El Paso Mo-
tors, Inc. Company in-
active with no assets 5,000.00 nil
125 White Sewing Machine
notes, no market 468.75 nil
1000 shares Mosqueteros Min-
ing Co., no market 460.00 nil
100 Bach Aircraft. Company
out of business
112.50
1 share Rio Grande Oil Co.
36.50
$ 2.371^
Membership L. A. Curb
Exchange, no market
100.00
nil
Cash
197.00
197.00
$106,374.75 %l99.Z7y2
Harry C. Westovcr, etc. 27
LIABILITIES
Notes Payable —
Exchange Publishing Co. $ 8,707.73
Mrs. N. C. Simmons
(Approx.) 2,000.00
Repurchase Contract —
Builders Inc. (Approx.) 21,000.00
Miscellaneous bills past due 775.00
$ 32,482.73
Excess of liabilities over
assets $ 32,283.35^^
The above in addition to Federal income tax, principal
and interest as of July 8, 1932 of $2143.42. [22]
28 E. C. Simmons vs.
EXHIBIT B
GC:Adm:C:EMH
260894
Oct. 18, 1932
Mr. E. C. Simmons,
848 South Oxford Avenue,
Los Angeles, California.
Sir:
Careful consideration has been given to the tentative
offer of $250.00 submitted by you in compromise of out-
standing balance of income tax for the year 1925, plus
assessed interest, in the total amount of $1,330.18, plus
accrued interest, and your offer is hereby rejected as the
evidence in the file does not indicate that you are in-
solvent or unable to pay the full amount of the tax.
You should promptly take up the matter of settlement
of this liability with the Collector of Internal Revenue at
Los Angeles, California, who is charged with responsi-
bility for collection and is being notified of the rejection
of your offer.
Respectfully,
(Signed) David Burnet
David Burnet
Commissioner
1 cc Collector, Los Angeles, Calif.
3 cc Clearing Division, Comp. Subsec.
1 cc A. & C Unit
1 cc I.R.A. in Chge., Los Angeles, Calif. [23]
Harry C. Westovcr, etc. 29
EXHIBIT C
TAX COLLECTION WAIVER
July 5, 1933
It is hereby agreed by and between E. C. Simmons of
Los Ang-eles, party of the first part, and the Commis-
sioner of Internal Revenue, party of the second part, that
the amount of $3472.06, representing an assessment of
income (kind of tax) tax for the year(s) 1925 made
against the said party of the first part, appearing on the
Nov. 590046-1929 Hst assessment list, page , line ,
for the Sixth District of California, may be collected
(together with such interest, penalties or other additions
as are provided for by law) from said party of the first
part by distraint or by a proceeding in court begun at
any time.
Edward C. Simmons
(Taxpayer)
By -
Guy T. Helvering
Commissioner of Internal Revenue
Chief Ofiice Deputy
3/5/34 By E. M. Cohee
Collector of Internal Revenue
E.M.C.
If this waiver is executed on behalf of a corporation, it
must be signed by such officer or officers of the corpora-
tion as are empowered under the laws of the State in
which the corporation is located to sign for the corporation,
in addition to which, the seal, if any, of the corporation
must be affixed. [24]
30 E. C. Simmons vs.
EXHIBIT D-1
Form 1656
Treasury Department
Internal Revenue Service
Revised 1934
OFFER IN COMPROMISE
To be filed in duplicate with collector for
your district
For Use of Collector
Class of tax Income
Special deposit
account No. 891385
Serial No. 54
Amount paid, $100.00
(Cashier's stamp)
Certified Check. Cash. M.O.
E. C. Simmons
(Name of taxpayer)
523 West Sixth St., Los Angeles, Cal.
(Address of taxpayer)
Date— April 23, 1936
Commissioner of Internal Revenue:
Through the Collector of Internal Revenue at Los
Angeles
Sir:
The following offer in compromise is submitted to you
by the undersigned :
Charges of violation of law or failure to meet an in-
ternal revenue obligation have been made against the pro-
Harry C. Westovcr, etc. 31
ponent as follows : Failure to pay in full additional 1925
income tax, payable 11/1/29 following ruling" that tax
accrued in 1925 instead of 1925 and 1926.
(State specifically the pending charge and/or
kind of tax and period involved)
Date and place of alleged violation November 1, 1929
— El Paso, Texas.
The alleged violation or failure is due to the following
cause or causes : Inability to pay owing to lack of funds.
(State in detail)
To secure the release of the proponent from the liability
resulting from the violation or failure above specified, the
sum of $2,316.88 is hereby tendered voluntarily with re-
quest that it be accepted in compromise of the said liabil-
ity, to wit: tax and interest as per attached schedule,
$2,216.88 of which already has been paid, as per schedule,
and check is enclosed for remaining $100. Since it has
been necessary for me to borrow the $100, its return is
requested in event this ofifer fails to meet the approval
of the commissioner.
(The liability includes tax or other principal liability,
interest, and/or ad valorem penalty; therefore the total
liability for each period involved, for which compromise is
sought, should be stated.)
The following facts and reasons are submitted as
grounds for acceptance of this offer : I am now and have
been for the last several years without regular income and
have subsisted upon borrowed money largely. My Habili-
3-2 E. C. Simmons vs.
ties, principally demand notes, exceed $28,000 with prac-
tically no offsetting assets.
(If space provided is insufficient, attach supplemental
affidavit and supporting evidence)
It is understood that this offer does not afford relief
from the liability sought to be compromised unless and
until it is actually accepted by the Commissioner, with the
advice and consent of the Secretary of the Treasury.
In making this offer, and as a part consideration
thereof, the proponent hereby expressly agrees that all
payments and other credits heretofore made to the
account (s) for the period (s) under consideration shall be
retained by the United States, and, in addition, the pro-
ponent hereby expressly waives:
1. Any and all claims to amounts of money to which
the proponent may be entitled under the internal revenue
laws for any years, calendar or fiscal, or for any period
fixed by law, expiring prior to the date of acceptance of
this offer, due through over-payment of any tax or other
liability, including interest and/or ad valorem penalty, or
interest on overpayments, or otherwise, as is not in excess
of the difference between the liability sought to be com-
promised hereby and the amount herein offered, and
agrees that the United States may retain such amounts
of money, if any.
2. The benefit of any statute of limitations applicable
to the assessment and/or collection of the liability sought
to be compromised, and agrees to the suspension of the
running of the statutory period of limitations on assess-
Harry C. Westovcr, etc. 33
ment and/or collection for the period during which this
offer is pending and for one year thereafter.
(If offer is made by agent, the reason therefor
must be stated on this line)
E. C. Simmons
(Signature of proponent or agent)
(Address of agent)
Sworn to and subscribed before me this 6 day of
Apf- May, 1936.
James G. Lytho, D.C.
(Signature of officer administering oath)
Waiver of statutory period of limitations is hereby
accepted, and offer will be considered and acted upon in
due course.
Guy T. Helvering
Commissioner of Internal Revenue
May 29 1936
By E. M. Cohee [Stamped] : Chief Office Deputy
E.M.C. Collector of Internal Revenue
[Stamped] : Received Jul 1, 1936. Technical Staff.
[Stamped] : Received Records Division, Bankruptcy
Unit. Jun. 19, 1936. Sub Section G.
[Stamped] : Collr. Int. Rev. 6th California. May 21,
1936. Paid.
[Stamped]: Posting. May 22, 1936. Date. [25]
54
E. C. Simmons vs.
EXHIBIT D-2
DATA AND RECOMMENDATION SUBMITTED
BY THE COLLECTOR
Commissioner of Internal Revenue, Washington, D. C. :
On reverse side hereof is an offer made by E. C. Sim-
mons, 523 West Sixth St., Los Angeles, Calif., in com-
promise of liability incurred because Inability to pay
additional 1925 tax and interest.
Return was filed on Form for
(Period)
on ,
(Date)
This case is (not) in suit.
Record of Assessments and Payments
Entries in detail should be made in the appropriate
columns below. The next to the last column should show
by symbols 'Td.," "Ab.," or "Cr.," the nature of each
entry in the preceding column and the last column should
show the balance due. All questions below should be
fully answered.
Kind of
Assessment,
Account No.
Tax, Penalty,
List
Year
Month or
Amount Assessed
Interest and
Page Line
Taxable Year
Inc. Tax
1929
1925
Nov. 590046
3285.76
Paid, Abated or Credited
P^- ] Schedule
Cr:[ No.
Pd.
Balance Due
Date
Amount
241.88
1/3/30
8/29/30
250.00
3/19/31
250.00
4/19/31
250.00
6/23/31
250.00
8/20/31
150.00
9/22/31
150.00
10/20/31
150.00
11/23/31
150.00
12/20/31
150.00
1/20/32
150.00
8/15/33
75.00
6/11/34
1255.18
Abt
. Uncol
7249.
Harry C. Westovcr, etc. 35
[STAMPED] :
THIS FORM 656
FOR MEMORANDUM PURPOSES ONLY
OFFER REJECTED 8-9-38
REJECTION SCHEDULE (DATE) 8-12-38
Compromise Offer
Amount of previous tender $
Amount of this tender Paid $100.00
Total amount offered " 100.00
Demands Issued
Form 69 Date Dec. 17, 1929
Form Date
Form Date
Notice of lien was filed on the 20 day of Dec, 1929 at
Los Angeles, Calif.
Was a bond for collection filed?
If so, furnish copy of same
Were any collection waivers filed? Yes
If so, furnish copies attached
Was the Revenue Agent in Charge requested to make an
investigation? Yes If so, when? 5/19/36.
I recommend* that the offer be
(Accepted or rejected)
for the following reasons :
Being investigated under the provisions of Mim.
#3832.
Date signed May 29, 1936.
Nat Rogan
Collector 6th District of California
*Recommendation should always be made if report of
deputy collector is forwarded with this form; if not, the
collector's recommendation should be submitted with the
report of the deputy collector. [26]
36 E. C. Simmons vs.
EXHIBIT D-3
STATEMENT OF 1925 INCOME TAX
OF E. C SIMMONS
Transferred to Sixth California District From Texas
November, 1929
Attached to and made a part of Offer in Compromise
Dated April 23, 1936
Transferred to 6th Cal. for Collection : $3472.06
Paid 12/31/29 $241.88 Treas. Ck.
9/12/30 250.00
3/19/31 250.00
4/19/31 250.00
6/23/31 250.00
8/20/31 150.00
9/22/31 150.00
10/20/31 150.00
11/21/31 150.00
12/20/31 150.00
1/20/32 150.00
8/15/33 75.00 2216.88
Bal. of tax 1255.18
Accrued interest from 11/1/29 to 4/10/36 1341.42
Total tax and Int. to Apr. 10/36 $2596.60
[27]
Harry C. Westovcr, etc. 37
EXHIBIT D-4
FINANCIAL STATEMENT OF
E. C. SIMMONS
523 West Sixth Street
Los Angeles, Calif.
As of April 30, 1936
Submitted to Commissioner of Internal Revenue through
Collector of Internal Revenue at Los Angeles, California,
in . connection with Offer in Compromise hereto attached.
Assets :
Miscellaneous items $ 1008.17
Liabilities :
Demand notes payable $23525.18
U. S. Treasury a/c Income tax 2596.60
Simmons & Peckham 2084.74
Misc. personal accounts 1500.00
29706.52
Liabilities in excess of assets $28698.35
E. C. Simmons
Signature of proponent
Sworn to and subscribed before me this 6 day of
May, 1936.
James G. Lytho, D.C.
Signature of officer administering oath [28]
38 E. C. Simmons vs.
EXHIBIT D-5
COPY
TAX COLLECTION WAIVER
July 5, 1933
It is hereby agreed by and between E. C. Simmons of
Los Angeles, party of the first part, and the Commissioner
of Internal Revenue, party of the second part, that the
amount of $3472.06, representing an assessment of In-
come tax for the year 1925 made against the said party
of the first part, appearing on the Nov. 590046 — 1929
list assessment list, page line , for the Sixth
District of California, may be collected (together with
such interest, penalties or other additions as are provided
for by law) from said party of the first part by distraint
or by a proceeding in court begun at any time.
(Sgd.) Edward C. Simmons
" Guy T. H elver ing
Commissioner of Internal Revenue
3/15/34 By E. M. Cohee
Chief Office Deputy [29]
EXHIBIT E
C-TS :PL
CAD:ORM Aug. 9, 1938
Mr. E. C. Simmons,
523 West 6th Street,
Los Angeles, California.
Sir:
Reference is made to your offer of $2,316.88, consist-
ing of $100.00 cash and $2,216.88 previously paid on
Harry C. Westover, etc. 39
account of your tax liability, submitted through the office
of the collector of internal revenue, to compromise your
unpaid income tax liability, including interest, for the
year 1925.
The tax liability sought to be compromised was made
the subject of a final closing agreement entered into by
and between you and the Commissioner of Internal Rev-
enue under Section 606 of the Revenue Act of 1928
which was approved on schedule 3159. Accordingly, the
tax is legally due.
Careful consideration has been given to the above offer
and it is hereby rejected for the reason that the tax is
legally due and an amount in excess of the offer appears
collectible. There is no authority in the law for the
acceptance of an offer in compromise of tax legally due
for an amount less than can be collected.
It is suggested that you promptly take up the matter of
payment of this liability with the Collector of Internal
Revenue, Los Angeles, California, who is charged with
the responsibility of collection and is being notified of the
rejection.
Respectfully,
Commissioner
1 cc Collector, Los Angeles, Calif.
1 cc I.R.A. in Chg., Los Angeles, Calif.
1 cc Accounts and Collections Unit.
1 cc Records Division.
2 cc Clearing Division, Comp. Subsec.
ORM:NM
[Endorsed] : Filed Feb. 6, 1947. Edmund L. Smith,
Clerk. [30]
40 E. C. Simmons vs.
[Title of District Court and Cause]
STIPULATION
It Is Hereby Stipulated and Agreed by and between
the parties to the above entitled action, acting through
their respective attorneys, that the Stipulation of Facts
filed herein on February 6, 1947, be amended by striking
therefrom paragraph XVIII of the above Stipulation of
Facts.
Dated: This 10th day of February, 1947.
LATHAM & WATKINS
By Henry C. Diehl
Attorneys for Plaintiff
JAMES M. CARTER
United States Attorney
E. H. MITCHELL and
GEORGE M. BRYANT
Assistant United States Attorneys
EUGENE HARPOLE and
LOREN P. OAKES
Special Attorneys, Bureau of
Internal Revenue
By Eugene Harpole
Attorneys for Defendant
It Is So Ordered this 11 day of February, 1947.
JACOB WEINBERGER
District Judge
[Endorsed] : Filed Feb. 11, 1947. Edmund L. Smith,
Clerk. [31]
Harry C. Westovcr, etc. 41
[Title of District Court and Cause]
OPINION
The jurisdiction of this court is invoked pursuant to
Section 24 (20) of the Judicial Code as amended (28
use A Sec. 41 (20)) for the recovery of Federal income
taxes which plaintiff alleges were erroneously and illegally
collected from him for the calendar year 1925 together
with interest in the total amount of $3,159.27.
Stipulations of facts were entered into between the
parties; the case was tried on such stipulations and the
testimony of the plaintiff. Briefs have been filed, and the
case submitted for decision. We are indebted to counsel
for their industrious presentation of the points of law
involved herein. Our independent research has disclosed
no authority of importance other than that included in
their exhaustive briefs and written argument.
The uncontroverted and pertinent facts, as disclosed
by the stipulations, exhibits attached thereto, and testi-
mony are as follows:
The taxes herein involved are conceded by the parties
to have been properly assessed. [32]
As of November 4, 1929, the balance due was the sum
of $3,472.06. After notice and demand the Collector
issued a warrant of distraint on December 17, 1929, and
filed a notice of lien on December 19, 1929.
From December 31, 1929 to August 15, 1933, plaintiff
made payments in sums varying between $75.00 and
$250.00, totalling $2216.88. The balance of $1255.18,
plus interest, is the amount in controversy.
On August 1, 1932, plaintiff executed an "Offer in
Compromise'' on Treasury Department form 656, and
42 E. C. Simmons vs.
this offer was filed with the Collector of Internal Revenue
at Los Angeles, California, on August 15, 1932. Such
printed form included a waiver of the benefit of any
statute of limitations affecting the collection of the liability
sought to be compromised and consented to the extension
of any statute of limitations affecting the collection of the
liability by the period of time (not to exceed two years)
elapsed between the date of filing said offer and the date
on which final action should be taken thereon. Attached
to said offer was a letter from the taxpayer to which we
shall hereinafter refer, a financial statement of the tax-
payer, and the Collector's Recommendation.
The waiver was filed at the request of the Collector of
Internal Revenue, and was accepted in writing by the
Commissioner; the offer was rejected on October 18, 1932.
On July 5, 1933, plaintiff executed a tax collection
waiver wherein the taxpayer agreed that the tax might
be collected by distraint or by a proceeding in court
"begun at any time." Such waiver was filed at the [33]
request of the Collector of Internal Revenue and was
accepted in writing by the Commissioner; it was not filed
in connection with any offer of compromise, and no
compromise offer was pending on July 5, 1933. We shall
hereinafter refer to this waiver as the second or un-
limited waiver.
On May 6, 1936, plaintiff executed an ''Offer in Com-
promise" on Treasury Department Form 656, and this
offer was filed with the Collector of Internal Revenue at
Los Angeles, California, on May 21, 1936. Such printed
form included a waiver of the benefit of any statute of
limitations affecting the collection of the liability sought
to be compromised and consented to the suspension of
the running of the statutory period of limitations on
Harry C. Westovcr, etc. 43
collection for the period during which the offer might be
pending and for one year thereafter. Attached to said
offer was a financial statement signed by the taxpayer
under oath. The waiver, to which we shall hereinafter
refer as the third or limited waiver, was filed at the
request of the Collector of Internal Revenue, and was
accepted in writing by the Commissioner. The offer was
rejected August 9, 1938.
At the time the last mentioned offer was forwarded
to the Commissioner by the Collector, the latter attached
to it a copy of the second or unlimited waiver hereinbefore
mentioned.
Subsequent to August 9, 1938, no offer in compro-
mise from the plaintiff was pending or under consideration
by the Bureau of Internal Revenue, and from that date
until October 9, 1945, plaintiff had no correspondence or
conferences with the government concerning the tax [34]
involved herein, and to plaintiff's knowledge no attempts
were made during said period to collect said tax.
On October 9, 1945, the Collector made demand upon
the plaintiff for payment of the tax liability involved
herein, and on November 14, 1945, taxpayer paid said
liability, together with a fee of fifty cents for the release
of the lien created as heretofore mentioned.
A claim for refund of the amount paid was filed, and
after more than six months during which no action was
taken by the Collector with respect to said claim, this
action was brought.
The parties have agreed that the only issue before the
court is whether the collection of the tax was barred by
the statute of limitations, and that the answer to this
question depends upon the effect of the second and third
waivers given by the taxpayer.
44 E. C. Simmons vs.
Plaintiff points out in his opening brief that if no
waivers had been executed, collection of the tax would
have been barred six years after assessment, or on Octo-
ber 19, 1935; that the first waiver extended this period
for two months and three days, or until December 22,
1935 ; that if the second waiver had not been executed,
collection would have been barred on December 22, 1935;
that the third waiver, (assuming the second to have been
effective until the filing of the third) extended the statu-
tory period for collection by three years, two months and
nineteen days, or until March 13, 1939; that in order
for the defendant to prevail, the second waiver must be
held to have been effective not only for the period from
December 22, 1935 to May 21, 1936, but also from March
13, 1939 until November 14, 1945, the latter period
amounting [35] to nearly seven years.
Plaintiff advances three reasons why the second or
unlimited waiver was not in force at the time the tax was
collected :
1. The said waiver was invalid from the start and
the statute of limitations expired in 1935.
2. The said waiver was good only for a reasonable
time, which had expired long before collection in 1945.
3. The third or limited waiver superseded the second
or unlimited waiver and established a period of time which
expired in 1939.
Plaintiff devotes little argument to his contention that
the unlimited waiver was invalid from the beginning, his
theory in this regard being that because Section 276 (c),
26 use A, provides that the tax must be collected within
six years after it is assessed or prior to the expiration of
Harry C. Westovcr, etc. 45
any period for collection agreed upon, a definite period
must be stated in a collection waiver, and that the lan-
guage of the unlimited waiver involved herein did not
come within the provisions of the statute. He cites as
authority Bouvier's definition of "period" and also quotes
the definition of the word as given by Funk and Wag-
nails Practical Standard Dictionary.
Defendant replies to this contention with the statement
that plaintiff has conceded that Section 276 (c), 26 USCA,
applies only to taxable years beginning after December 31,
1938. and that the taxable year 1925 is governed by Sec-
tion 278 (d) of the Revenue Act of 1924. Defendant
further points out that at the time the waiver was
executed, there was no statute in effect providing in [2)61
what manner, or for what period the statute of limita-
tions for collection of taxes might be waived.
Defendant cites Cunningham Sheep & Land Co. (1927),
7 BTA 652, wherein the Board ruled:
(p. 655)
"The position of counsel is that the consent of
September 1, 1923, is indefinite in time and is there-
fore of no effect under the Act, which, it is said by
counsel, contemplated an intention that the consent
should contain a statement of a 'particular period'
during which the assessment might be made. In our
opinion the Act does not have the effect of making
void such consents as we are here considering. While
a consent fixing a definite date for the expiration
of the period in which assessment might be made may
be desirable to remove uncertainty, there is nothing
in the statute which requires that the expiration of
the period be related to a definite date."
46 E. C. Simmons vs.
Plaintiff cites no reported case holding an unlimited
waiver invalid because no definite period is fixed, and we
find no portion of the statutes cited by either party in
their respective briefs which we deem effective to make
void the second or unlimited waiver we [^7^ are here con-
sidering.
We shall consider next plaintiff's contention that the
third or limited waiver superseded the second or un-
limited waiver and established a period of time which
expired in 1939.
Plaintiff proposes a rule of construction, "It is a well
settled principle of income tax law that doubts as to a
waiver's effectiveness must be resolved against the gov-
ernment." In support, he cites two Board of Tax Appeals
cases, — D. J. Gay v. Commissioner, 31 BTA 580 and
Union Shipbuilding Co. v. Commissioner, 43 BTA 1143.
Both of these cases deal with the authority of a person to
execute a waiver on behalf of a dissolved corporation.
Those cases, and the cases cited therein, offer no parallel
to the matter before us and are of no assistance in
determining the issues here raised.
Defendant argues against the principle offered by plain-
tiff, and cites Clifton Mfg. Co. v. U. S., 3 FS 508, and
W. P. Brown & Sons Lumber Co. v. Commissioner, 38
F. (2d) 425, as authority that statutes imposing limita-
tions upon action by the United States are to be con-
strued in favor of the government. This principle is
enunciated in E. I. DuPont de Nemours & Co. v. Davis,
264 US 456, and in U. S. v. Whited & Wheless, Ltd.,
246 US 552, while in United States v. Updike, 281 US
489, we find the rule given "which requires taxing acts,
including provisions of limitations embodied therein, to
Harry C. Westovcr, etc. 47
be construed! liberally in favor of the taxpayer." (P.
496.)
In United States v. Havner, 101 F. (2d) 161, Judge
Sanborn of the Eighth Circuit observed, when discuss-
ing Section 276 (c), 26 USCA: [38]
(p. 165)
". . . since there is no ambiguity in the language
of the section with which we are concerned, there is
no room for construction."
We find no ambiguity in the Section above mentioned,
and see no necessity for construction.
Plaintiff calls attention to the fact that when the
Commissioner accepted the third waiver, he had knowl-
edge that the second, or unlimited waiver, was already
on file. This may be assumed, because on Exhibit D-2,
it is noted by the Collector that other waivers had been
filed, and a copy of the second or unlimited waiver was
attached to the offer in compromise which accompanied
the second waiver in the Commissioner's file. Plaintiff
argues that, when, notwithstanding his knowledge that
there was an unlimited waiver on file, the Commissioner
accepted the third, or limited, waiver, the Commissioner
intended the third or limited waiver to supersede the second
or unlimited waiver. Plaintiff cites Atlantic Mills of
Rhode Island v. U. S., 3 FS 699 (1933), with the state-
ment that a waiver is not effective until signed by the
Commissioner. This question is not before us, as all the
waivers herein involved were signed by the Commissioner.
Plaintiff next cites Helvering v. Ethel D. Co., 70 F.
(2d) 761 (1934), a case decided by the Court of Appeals
of the District of Columbia, upon a Petition of the Com-
48 E. C. Simmons vs.
missioner for review of a decision of the [39] Board of
Tax Appeals. A deficiency had been determined against
a corporation, but the tax had not been assessed, when
an unlimited waiver was filed. The Board found as a
fact that a second waiver was requested immediately upon
receipt of the first, and the Board also found that both
the taxpayer and the Commissioner intended that the
second, or limited, waiver should abrogate the first or
unlimited waiver. The Court in its opinion stated:
(p. 762)
"The point in the case is confined to the single issue
whether the Board was correct in holding that the
making and acceptance of the second waiver abro-
gated the first. The answer, as we think, depends
upon the intention of the parties at the time of the
event in question."
The Court then proceeded to review the evidence to
ascertain if the same sustained the findings that the
second waiver was requested immediately upon receipt of
the first and was intended to be substituted for the first.
The Court agreed that the first mentioned finding was
sustained by the evidence introduced regarding the dates
of the waivers and the correspondence intervening be-
tween such dates.
In considering the evidence which justified the finding
on intent, the Court stressed these facts:
The second, or limited, waiver was requested immedi-
ately after receipt of the first, and enclosed a form of
waiver different than the first. [40]
The taxpayer executed the waiver, and at the same
time called attention to the fact that it had already executed
a different one.
Harry C. Westovcr, etc. 49
The Court found:
(p. 763)
"The answer of the taxpayer is consistent with
the finding of the Board that in signing the second
waiver it acquiesced in the request of the Commis-
sioner because it understood the first was not satis-
factory and that the second was intended to re-
place it."
As further bearing upon the intention of the parties,
the Court mentioned that a few months preceding the
correspondence the Commissioner had by a departmental
ruHng Hmited all unlimited waivers then on file to a definite
date and that thereafter it had been the practice of the
Bureau in the request for waivers from taxpayers to
limit the time of the waiver to the period of one year.
Also, a new form of waiver was adopted and substituted
for the old form. The unlimited waiver first signed by
the taxpayer was on an old and obsolete form. In addi-
tion the Court stated:
(p. 763)
"There was doubt whether it was not terminable
by the taxpayer on notice, and likewise doubt whether
it would terminate without notice after a reasonable
time, and it [41] referred to statutes some of which
had been repealed. It may very well be, as the Board
found, that these reasons impelled the request for the
second waiver, and that they likewise indicate the
purpose of the parties in executing it, and in this
view we should have to affirm the Board's decision."
The Court continued :
"But in addition to what has just been said, it is
fair to point out that, without regard to the motive
50 E. C. Simmons vs.
inducing the request for the second waiver, it is un-
deniable that, when it was returned by the taxpayer
and received by the Commissioner, the first waiver
had been received and filed. If the Commissioner
was satisfied that it conformed to the requirements
of the law and rules in relation to waivers and that
it was effective to extend indefinitely the time of mak-
ing the assessment, it was obvious that the second
waiver added nothing to what the government already
had. Notwithstanding this, the evidence shows the
second waiver was accepted and agreed to by the
Commissioner. [42] The Board has found as a fact
that in this respect the Commissioner intended that it
should be substituted for the unlimited waiver, and,
since both wavers covered the same subject matter
but were inconsistent with one another in relation to
the time element, the rule with relation to agreements
between the same parties concerning the same subject
matter is applicable. In such circumstances, it has
invariably been decided that the later rather than the
earlier writing will be held to be the agreement be-
tween the parties on the subject."
(p. 764)
"Nor can there be any doubt of the inconsistency
of the two waivers. The first was unlimited. The
second required the government to make the assess-
ment prior to the end of the calendar year in which
it was executed. In such circumstances it has [43]
been held that the provisions of the first clearly in-
consistent with the provisions of the later one will
be superseded, the inconsistent provisions of the first
yielding to those of the second."
Harry C. West over, etc. 51
In the concluding paragraph of its opinion, the Court
cited Greylock Mills v. Commissioner, 31 F. (2d) 655,
658, and observed that while it need not decide the ques-
tion of whether a waiver would fall of itself after a
reasonable time, it was admitted that the taxpayer should
have the right to terminate such a waiver by notice.
(p. 764)
". . . we regard the case here as involving only
a question of fact, which, in turn, has been definitely
found by the Board against the Commissioner, and
which we find there is evidence to sustain."
Plaintiff also cites Farmers Union State Exchange v.
Commissioner, 30 BTA 1051. There the statute began
to run on June 16, 1919; on January 15, 1923, the tax-
payer executed an unlimited waiver; then on June 9, 1924,
the taxpayer executed a limited waiver. The Board an-
nounced the rule that "An unlimited waiver does not sus-
pend the running of the statute forever, but only for a
reasonable time or until the termination by either party
upon reasonable notice." The Board held that under the
[44] circumstances, to hold that the first waiver was still
in effect after the execution of the second waiver would
be the equivalent of "brushing aside" the meaning of the
second waiver. In addition, the Board pointed out that
the execution of the second waiver, before the first had
become effective, was sufficient to constitute a reasonable
notice that the first waiver was terminated.
Plaintiff in his reply brief stresses the contention that
if the government had no intention that the limited waiver
should supersede the unlimited waiver its act of accepting
the latter waiver was meaningless. Plaintiff cites Stange
V. U. S., 282 U. S. 270, and quotes Judge Brandeis' con-
52* E. C. Simmons vs.
eluding sentence in his opinion in this case — (p. 277)^ —
''It must be assumed that an effective and not a futile act
was intended."
On the question of whether the limited or third waiver
superseded the second or unlimited waiver, defendant Col-
lector- cites U. S. V. Fischer (1937), 93 F. (2d) 488, a
decision of the Second Circuit reversing the District
Court's opinion reported at 16 F. S. 743.
In the Fischer case, according to the District Court's
opinion, the taxes involved were those for the years 1920
and 1921. March 12 and 15, 1926, assessments were
made. March 28, 1926, the Collector made demand upon
defendant for payment. In its opinion the District Court
stated that March 12 and 15, 1932 were the last respective
dates for the commencement of actions to collect said taxes.
On January 16, 1932, defendant submitted an offer in
compromise wherein he consented to the extension of the
statute of limitations by the period of time not to exceed
two years, elapsed between the filing [45] of the offer
and the date on which the final action should be taken.
The District Court stated:
(p. 744)
"The effect of this waiver was to interpose a sus-
pension of the statute which on January 16, 1932
would have become operative after the lapse of 56
and 59 days, respectively and those periods were
available to the government after action had been
taken upon the compromise offer, if the legal situa-
tion was unaffected by other events."
Continuing its summary of the facts, the District Court
observed that on February 4, 1932, the taxpayer signed
a waiver wherein it was agreed that one tax item might
Harry C. Westover, etc. 53
be collected by distraint or by a proceeding begun at any
time prior to December 31, 1933, and on February 5,
1932, a similar waiver was executed with reference to
the remaining item. The District Court stated:
(p. 745)
''Standing alone, these papers would seem to limit
the government's right to bring suit to December
30, 1933.
"They must have been so construed by the Collector
of Internal Revenue, for on September 15, 1933, he
wrote to [46] secure additional waivers which would
extend the time until December 31, 1934, but none
were granted by the administrator.
"The question is whether these two last-mentioned
waivers had any effect upon the government's time
to bring suit, which 17 days earlier had been enlarged
(there being then 56 and 59 days remaining as has
been said) by an indefinite period which would not
exceed a duration of two years.
"It is interesting to consider why the waivers
second in point of time were entered into at all. If
they must be now disregarded as having had no
necessary place in the relations between the govern-
ment and the taxpayer, the infirmity was congenital.
If that is true, why should the effort have been made
to prolong the suspension of the statute by supple-
menting those waivers for an additional year, as was
unsuccessfully attempted on September 15, 1933?
"It will be seen that the government had left less
than [47] two months in which to institute suit,
when the compromise offer and the waiver accom-
panying it of January 16, 1932, were filed. If that
54 E. C. Simmons vs.
offer had been declined by February 2, 1932, suit
would have been necessary prior to April 1st of that
year. But, by arranging on February 4th for an
extension of almost 23 months, the government was
sure of that period of time within which it could
reject the compromise and bring suit as well. In
other words, an indefinite period was exchanged for
a definite period, which may have been advantageous
to the government from the standpoint of administer-
ing the Income Tax Law."
The Circuit Court, in its opinion reversing the District
Court mentioned that the lower court had come to the
conclusion that the suit was barred, and stated:
(p. 489)
"We think that in so doing an erroneous concep-
tion of the effect of the first waiver was entertained.
The defendant obtained consideration of his com-
promise offer by agreeing that the statute of limita-
tions should be [48] extended as therein provided.
This effectively tolled the statute for the period up to
final action on the offer with a two year limitation.
It was not a contract. Aiken v. Burnet, 282 U. S.
277, 51 S. Ct. 148, 75 L. Ed. 339. It was but a
voluntary unilateral waiver of a defense. Stange v.
U. S., 282 U. S. 270, 276, 51 S. Ct. 145, 147, 75 L.
Ed. 335. Nor were the subsequent waivers to De-
cember 31, 1933 contracts. The extension already in
effect was, consequently, not reduced by additional
unilateral waivers, since the government relinquished
no rights by accepting them. As final action on the
offer of compromise was not taken until after the
fixed date of the additional waivers had passed, the
Harry C. Westover, etc. 55
parties were simply left as they would have been had
they not been executed at all."
In Atlantic Mills of Rhode Island v. United States, 3
F. S. 699, cert. den. 291 U. S. 676, a case cited by plain-
tiff on a different point, we note the Court looked [49]
to the language of a limited waiver to see whether or not
by its terms it could be effective as a notice of termination
of an unlimited waiver. The limited waiver was not
accepted by the Commissioner, but taxpayer contended
that, nevertheless, it operated as a notice. A portion of
the opinion of the Court of Claims reads:
(p. 703)
"The document relied upon by plaintiff in support
of these contentions, executed on February 9, 1923,
is not susceptible of the construction that it was a
notice to the Commissioner that the waivers thereto-
fore duly executed and filed with the Commissioner
and approved and signed by him February 9, 1923,
would terminate on December 31, 1923.
"By its plain terms this document was clearly in-
tended as a consent in writing by the taxpayer and
the Commissioner with respect to 1917, and it was
executed and filed with the Commissioner with that
purpose in mind and with the view that it would be
approved and signed by the Commissioner as a
waiver contemplated by the statute rather than as
a notice that the con- [50] sents theretofore filed
and approved would terminate and become ineffective
after December 31, 1923. The language of the docu-
ment shows that it was intended as a waiver rather
than as a notice . . ."
56 E. C. Simmons vs.
There is nothing in the language of the third or limited
waiver which could lead us to believe that it was intended
as a notice of termination of the unlimited waiver. Nor
are we required, if such were not the purpose of the third
or limited waiver, ''to brush aside the meaning of the later
waiver" within the language of Farmers Union State Ex-
change V. Commissioner, 30 B. T. A. 1051; nor, are we
required, if such were not the purpose of said waiver, to
assume that by requesting such waiver, a futile act was
intended to be accomplished. On the contrary, it is logical
to assume that when the Commissioner requested the
third waiver, he intended to secure a fixed period within
which he might consider the compromise offer and investi-
gate the financial status of the taxpayer, during which
period, in the event the taxpayer filed notice of termina-
tion of the unlimited waiver, the Commissioner would not
be left without a waiver.
We therefore hold that the second or unlimited waiver
was not terminated by the giving of the third or limited
waiver.
Plaintiff further maintains that a waiver which is not
limited as to duration is valid only for a reasonable time,
and calls attention to the fact that the elapsed [51] time
from the date of filing of the second or unlimited waiver
to the date of collection of the tax amounts to twelve
years, four months and nine days during the last seven
years, three months and five days of which time there
were no proceedings of any sort had or pending between
the plaintiff and the government; that more than a reason-
able length of time had elapsed and the waiver was there-
fore no longer in effect at the time collection was made.
In support of such theory, plaintiff cites Herman Frost
V. Commissioner, 23 B. T.A. 411, decided in 1931, and
Harry C. West over, etc. S7
Nathan Loeser v. Commissioner, 27 B. T. A. 601, de-
cided in 1933.
In the Frost case, the member rendering the opinion
[LBF 3/3/48] had
stated that the Board that theretofore held that where
a waiver was filed which provided for determination, as-
sessment and collection irrespective of any period of
limitations, the Commissioner had a reasonable time with-
in which to act. (Citing: Cunningham Sheep & Land
Co., 7 B. T. A. 652; Greylock Mills, 9 B. T. A. 1281,
aff'd. 31 F. (2d) 655; William S. Doig, Inc., 13 B. T. A.
256; and Corn Products Refining Co., 22 B. T. A. 605.)
It was further mentioned that a claim for abatement had
been filed, and that a very confused state of afifairs ex-
isted with reference to the liability of the parties con-
cerned on account of the dissolution of the corporation.
The deficiencies were assessed in January 1924, the waiver
filed in 1924, and petitioner was advised of his liability
in January 1927. The Board held that "in view of the
record" the lapsed time was not unreasonable and that
collection was not barred by the statute.
In the Nathan Loeser case (supra), the member who
[52] rendered the opinion stated therein:
(p. 604)
"We have frequently held that an unlimited waiver
permits the Commissioner a reasonable time in which
to act. Cunningham Sheep & Land Co., 7 BTA 652;
Greylock Mills, 9 BTA 1281; afif'd. 31 Fed. (2d)
655, Cert. den. 280 US 566; William S. Doig, Inc.,
13 BTA 256; Herman Frost, 23 BTA 411.
"What is a reasonable time is not to be determined
abstractly or solely by reference to the calendar. It
58 E. C. Simmons vs.
depends on all the circumambient facts of the situa-
tion. ... In the instant case, judged solely by
the calendar, a very considerable time elapsed between
the signing of the waiver and the issuance of the
notice of deficiency. But, viewed in the light of all
the facts, each being related directly or indirectly to
the other, we do not believe it can properly be said
that respondent failed to act within a reasonable
time . . . [53]
"The waiver in question was requested, executed
and received only because of the controversy relating
to the taxable status of the corporation. It specifi-
cally refers to the matter as did the forwarding let-
ter. The action of both the petitioner and the cor-
poration in filing claims for refund shows that they
were continuously aware of the uncertainty of the
outcome and sought to protect themselves by filing
such claims. In order to avoid a multiplicity of pro-
ceedings the respondent refrained from taking action
as to the 1920 tax until the identical issue should be
decided by the Board. Under such circumstances,
we are of the opinion that the respondent acted within
a reasonable time."
The Nathan Loeser case, as the Frost case, previously
hereinabove mentioned, involved the determination of a
liability. The waiver was dated September 25, 1925. The
notice of deficiency was issued July 17, 1931.
It is interesting to note that both the Frost and the
Loeser opinions include in their citations of [54] authori-
ties on the point that an unlimited waiver permits the
Commissioner a reasonable time to act, the case of Grey-
lock Mills, 9 B. T. A. 1281, aflf'd. 31 Fed. (2d) 655.
Harry C. Westovcr, etc. 59
In Cunningham Sheep & Land Company, 7 B. T. A.
652, we find an expression of the reasoning upon which
the Board based its "reasonable time" theory:
(p. 655)
"The courts are frequently confronted with con-
tracts which fail to fix the period within which they
are to be performed. Courts are reluctant to declare
any contract void for uncertainty if the intent of the
parties can be determined. In those cases where
the uncertainty relates to the time of performance of
the contract, the courts have found little difficulty in
arriving at the conclusion that a reasonable time is to
be allowed. There are some variations of this rule,
one of which permits one of the parties in certain
circumstances to give notice to the other of the time
within which performance should be made, reasonable
notice being given. It appears to us that the rules
laid down by the courts for construction of such
agreements are [55] properly to be applied to the
consent entered into between the Commissioner and
this taxpayer and that under the consent of Septem-
ber 1, 1923, the Commissioner was given a reasonable
time after the date of its execution in which to de-
termine and assess the deficiency."
The defendant Collector disagrees with plaintiff's con-
tention that the waiver fell after the lapse of a reasonable
time, and cites Greylock Mills v. Commissioner, (C. C. A.
2, 1929), 31 F. (2d) 655, Cert. Den. 280 U. S. 566.
The Greylock case concerned the statute of limitations
with reference to the assessment of a deficiency and the
Board of Tax Appeals held that the Commissioner acted
60 E. C. Simmons vs.
within [LBF 3/3/48]
with a reasonable time after the execution of an un-
Hmited waiver, a period of three years having elapsed.
The Circuit Court affirmed the Board of Tax Appeals
decision, (31 F. (2d) 655), stating that it might rest its
affirmance upon the same ground as that of the Board,
that the Commissioner acted within a reasonable time.
At page 658 :
"But there is also another ground equally fatal to
appellant's contention. If waivers which are in terms
unlimited are to be limited at all, we think they should
expire only after the taxpayer gives notice to [56]
the Commissioner that he will regard the waiver as
at an end after a reasonable time, say three or four
months, from the date of such notice. In such a
rule there is no harshness to either party; on the
contrary, it seems to us the most reasonable one. An
analogy may perhaps be found in the case of con-
tracts for the sale of land, where time does not or-
dinarily become of the essence unless expressly so
stated, until notice is given by one party and an op-
portunity afforded to the other to act. (citing cases.)
In the instant case, no such notice was given to the
Commissioner, and we think the waiver remained
outstanding so that he was entitled to act at his
leisure."
In Greylock Mills v. White, 63 F. (2d) 866, the First
Circuit in its opinion at page 868 stated:
"The waiver in this case, being unlimited in dura-
tion extended the period for the assessment and col-
lection of the 1918 tax at least a reasonable time
beyond the then statutory limit of June 15, 1924.
Harry C, Westover, etc. 61
(citing cases.) Whether it [57] continued the period
indefinitely until either the taxpayer or the commis-
sioner gave notice of the termination of the waiver,
it is not necessary to decide, although it might be so
terminated at any time on reasonable notice given by
either."
At page 868,. the First Circuit commented upon the
opinion of the Second Circuit heretofore mentioned and
reported at 32 F. (2d) 655 :
"The Circuit Court of Appeals held that the waiver
in this case was effective in extending the time for
both assessment and collection of the 1918 tax beyond
the limitation fixed in the prior statutes, and ex-
pressed the opinion that it extended the time for col-
lection of a tax assessed prior to the date of its
execution and until the taxpayer gave notice of a
termination of the waiver. On the last proposition
we express no opinion."
Defendant Collector also cites Big Four Oil & Gas Co.
V. Heiner, 57 F. (2d) 29 (1932), a decision of the Third
Circuit Court of Appeals, wherein there was a delay of
four and a half years between assessment and collection
of deficiency income tax because of taxpayer's claim for
[58] credit. The Court stated:
(p. 30)
"The only question, therefore, to be decided is
whether or not the unlimited waiver filed March 2,
1923, authorized the collection by distraint in Novem-
ber, 1928 of the tax assessed on March 15, 1924.
"If such a waiver does require the Commissioner
to act within a reasonable time, the evidence was
62 E. C. Simmons vs.
sufficient to allow the court below to say that the
period between the assessment, March 15, 1924, and
the collection of the deficiency, November 8, 1928,
was not unreasonable, because shortly after the as-
sessment the appellant filed a claim for credit which
was duly considered and rejected prior to June 24,
1927, when the second notice and demand were is-
sued. . . . The delay in collecting the tax must
have been caused by the time required to consider the
appellant's claim for credit. It cannot object to a
delay that it caused."
The Circuit Court then cited the case of Greylock Mills
V. Lucas, 31 F. (2d) 655, and quoted from [59] the por-
tion of the opinion in that case wherein it was held that
an unlimited waiver remains outstanding until notice is
given of its termination. After such quotation, the Court
in the Big Four Oil & Gas Co. v. Heiner case said :
(p. 31)
"This rule seems reasonable and the present case
falls within its scope."
In Warner Sugar Refining Company, 4 B. T. A. 5, the
Board considered an unlimited waiver, stating:
(p. 11)
''No notice was ever served upon the Commissioner
by the taxpayer prior to the assessment of the amount
here in controversy as to when it would regard the
provisions of the waiver as having been fully com-
plied with by both parties and become inoperative."
Harry C. Westovcr, etc. 63
In F. L. Bateman v. Commissioner, 34 B. T. A. 351,
the Board held:
(p. 358)
"Under all the facts and circumstances here present,
the delay in mailing the notice of deficiency, about
Ayi years after the expiration of the statutory period
for assessment had expired, is not so unreasonable
as to invalidate the waiver for [60] 1920.
"Furthermore, it has been held that waivers un-
limited as to time expire only upon reasonable notice
to that effect given by the taxpayer. (Citing Grey-
lock Mills V. Commissioner, 31 F. (2d) 655.) No
notice was given here."
Defendant directs attention to the fact that in none
of the Board of Tax Appeals cases cited by plaintiff did
the Board conclude the Commissioner had failed to act
within a reasonable time, and that therefore it was not,
in any of the cases cited, necessary for the Board to pass
upon the question whether an unlimited waiver survived
beyond a reasonable time and until notice of its revoca-
tion was given by the taxpayer. In view of our conclu-
sions hereinafter expressed we, also, find it unnecessary
to pass upon that portion of plaintiff's contentions.
The plaintiff points out in his brief that there elapsed
a period of seven years between the rejection of the last
offer in compromise and the collection of the tax on No-
1945 [LBF 3/3/48]
vember 14, 1943 :
"Thus for a period of more than seven years the
government chose to remain inactive regarding the
collection of these taxes . . . this period of in-
64 E. C. Simmons vs.
activity is so patently unreasonable that the court
should, as a matter of law find that the government
failed to act within [61] a reasonable time."
We note that in the letter from the taxpayer which
accompanied the first offer in compromise disclosed that
the taxpayer held a position, the salary for which, even
after successive cuts, amounted to at least $720.00 a
month. In the letter the taxpayer stated that his posi-
tion was the result of contacts made with his employers
before his financial troubles multiplied, and he indicated
that were his financial status known his employment would
be shortly terminated; he detailed his expenses, and pre-
sented the sad picture of a man, formerly affluent, who
had been caught in the crash, who had been forced to
borrow on his insurance to support his family; that his
insurance would shortly be in default, and he had been
pronounced uninsurable. His financial statement showed
an excess of liabilities over assets of the sum of $32,-
482.73. It was a year after writing this letter, and after
he had been informed that the Collector would not accept
his offer in compromise, and that he should promptly take
up the matter of his liability with the Collector, that the
taxpayer executed the second, or unlimited waiver.
We note also that in the offer of compromise filed in
1936, the taxpayer stated he had been without regular
income and that he had subsisted largely upon borrowed
money; he offered $100.00 in compromise of his liability,
and stated he had been obliged to borrow that sum ; his
financial statement showed liabilities in excess of assets
in the sum of $28,698.35.
Again, on August 9, 1938, the government rejected
his offer in compromise, and again suggested that he
Harry C. Westover, etc. 65
promptly take up the matter of his liability with the [62]
Collector of Internal Revenue at Los Angeles.
In Nathan Loesner v. Commissioner, 27 B. T. A. 601,
cited by plaintiff, it is stated that what constitutes a rea-
sonable time is not to be determined abstractly or solely
by reference to the calendar; that it should be viewed in
the light of all the facts of the situation. In each of the
cases cited by counsel wherein it is considered whether
the elapsed time is reasonable, the facts and circumstances
are different. None of the cases to which our attention
has been directed provide us with a measuring stick for
"reasonable time" in the matter before us, because, in
most if not all of those cases, the period considered was
one during which the Commissioner had failed to assess,
or to finally determine after a controversy, the amount
owed by the taxpayer. Here the amount had been de-
termined; that it was due had been conceded by the tax-
payer. There was no failure of the government to act
which was occasioning the taxpayer anxiety, inconven-
ience, or uncertainty.
We believe that in determining what constitutes a rea-
sonable time in cases such as this, the court should con-
sider not only the facts and circumstances present in each
case, but also the objects of statutes of limitations in
connection with such particular facts and circumstances.
In Bell V. Morrison, 26 U. S. 350, Justice Story com-
mented :
(pp. 360-361)
". . . It is a wise and beneficial law, not de-
signed merely to raise a presumption of payment of a
just debt from lapse of time, but to [63] afford
66 E. C. Simmons vs.
security against stale demands, after the true state
of the transactions may have been forgotten, or be
incapable of explanation, by reason of the death or
removal of witnesses. It has a manifest tendency to
produce speedy settlements of accounts, and to sup-
press those perjuries which may rise up at a distance
of time, and baffle every honest effort to counteract
or overcome them. . . . The statute of limitations
was not enacted to protect persons from claims fic-
titious in their origin, but from ancient claims, wheth-
er well or ill founded, which may have been dis-
charged, but the evidence of discharge may be lost."
The unlimited waiver provided clearly that the tax
might be collected "at any time." There is no doubt that
the taxpayer gave such waiver in the hope that the govern-
ment might refrain from drastic collection procedure
which would imperil taxpayer's means of livelihood, and
that the taxpayer might be given grace to enable him to
pay his debt without the necessity of such procedure.
". . . definite unambiguous statements in writ-
ten waivers, [64] made for the purpose of obtaining
action favorable to the maker and on which such
action is obtained, must be given effect." (S. S.
[LBF 3/3/48] 93
Pierce Co. v. U. S., 935 F. (2d) 599, at 601.)
We assume that the taxpayer, when he gave the un-
limited waiver, intended to pay the debt to the govern-
ment which he conceded to be due. That the government
withheld action, over a long period, and made final de-
Harry C. W estovers etc. 67
mand at a time when taxpayer was able to discharge his
just liabihty, should not be deemed unreasonable. As
was said in Shambaugh v. Scofield, 132 F. (2d) 345, —
(p. 347) : "Having had full advantage of the waivers,
the taxpayers should not now be heard to repudiate them
unless they were clearly inoperative."
For the reasons herein stated, we conclude that at the
time of collection of the tax, the second or unlimited
waiver was operative.
Dated this 26th day of February, 1948.
JACOB WEINBERGER
United States District Judge
[Endorsed] : Filed Feb. 26, 1948. Edmund L. Smith,
Clerk. [65]
[Minutes: Wednesday, March 3, 1948]
Present: The Honorable Jacob Weinberger, District
Judge.
It appearing that through inadvertence the opinion
filed herein on Feb. 26 1948, contains several typographical
errors, it is ordered that said opinion be corrected by the
clerk by interlineation as follows: page 21 — 6th word of
line 15 the word "that" should be changed to *'had". Page
25 — line 19: the word "with" should be changed to "with-
in". Page 30 — line 24 : the figures "1943" should be changed
to "1945". Page 34— line 7: the figures "935" should be
changed to "93". [66]
68 E. C. Simmons vs.
[Title of District Court and Cause]
FINDINGS OF FACT AND CONCLUSIONS
OF LAW
The above case came on regularly for trial on February
6, 1947, before the above entitled Court sitting without
aid or intervention of a jury; the plaintiff appearing
by Latham and Watkins by Henry C. Diehl, Esq., and
the defendant appearing by James M. Carter, United
States Attorney for the Southern District of California;
George M. Bryant, Assistant United States Attorney for
said District, and Loren P. Oakes, Special Attorney,
Bureau of Internal Revenue; and the trial having pro-
ceeded and a Stipulation of Facts by the parties hereto
having been [67] submitted, and oral evidence on behalf
of plaintiff also having been submitted to the Court for
consideration and decision, and the Court on the 26th
day of February, 1948, having rendered its opinion here-
in, and the Court from the foregoing Stipulation of Facts
and oral evidence, makes the following Findings of Fact
and Conclusions of Law:
FINDINGS OF FACT
L
This action involves an alleged overpayment of Federal
income taxes for the calendar year 1925.
2.
The defendant is and has been since prior to November
14, 1945. the duly appointed and acting Collector of In-
ternal Revenue of the United States for the Sixth District
of California, and plaintiff is an individual residing within
said District.
Harry C. Westover, etc. 69
3.
On or about October 19, 1929, there was assessed
against the plaintiff income taxes for the year 1925 ; cer-
tain overassessments for other years were credited against
the amount assessed, leaving a balance due of $3,723.06.
Notice and demand were issued on November 4, 1929 and
on November 18, 1929; on December 17, 1929, a warrant
of distraint was issued with respect to such liability, and
on December 19, 1929, notice of lien was filed with the
County Recorder of Los Angeles County, California.
4.
Plaintiff made payments from time to time in [68]
amounts varying between $75.00 and $250.00 on said out-
standing balance, until on August 15, 1933, at which time
the balance due on said tax was the sum of $1,255.18,
with interest thereon.
5.
On August 1, 1932, plaintiff executed an "Offer in
Compromise" on Treasury Department Form 656, a
printed form including a waiver with respect to the statute
of limitations, which waiver provided that the taxpayer
waived the benefit of any statute of limitations affecting
the collection of the liability sought to be compromised
and in the event of the rejection of the offer expressly
consented to the extension of any statute of limitations
affecting the liability sought to be compromised by the
period of time, not exceeding two years elapsed between
the date of the filing of the offer and the date on which
final action thereon should be taken. The offer and waiver
were executed at the request of the Collector of Internal
Revenue, and were filed with the Collector of Internal
Revenue at Los Angeles, California, on August 15, 1932.
70 E. C. Simmons vs.
6.
Plaintiff attached to said "Offer in Compromise" his
letter dated July 20, 1932, addressed to the Commissioner
of Internal Revenue, wherein the taxpayer enclosed a
financial statement which showed liabilities in amount of
$32,482.73 in excess of his assets, and wherein he in-
dicated that should his financial status become known to
his employer he w^ould lose his position.
7.
On August 25, 1932, the Commissioner of Internal
Revenue accepted in writing said Waiver of Statute of
[69] Limitations, and on October 18, 1932, said Com-
missioner rejected the ''Offer in Compromise."
8.
On July 5, 1933, at the request of the Collector of In-
ternal Revenue, the taxpayer executed a '*Tax Collection
Waiver," wherein it was agreed between the Commission-
er of Internal Revenue and the Taxpayer that the amount
of $3,472.06 representing an assessment of income tax
for the year 1925 might be collected, together with in-
terest, from the taxpayer by distraint or by a proceeding
in court begun at any time.
9.
At the time the waiver last above mentioned was exe-
cuted no offer in compromise was pending, and the waiver
was not submitted in connection with any offer in com-
promise. Said waiver was accepted in writing by the
Commissioner on March 5, 1934.
10.
On May 6, 1936, plaintiff executed an "Offer in Com-
promise" on Treasury Department Form 656, a printed
Harry C. Westover, etc. 71
form including a waiver with respect to the statute of
limitations, which waiver provided that the taxpayer
waived the benefit of any statute of limitations affecting
the collection of the liability sought to be compromised,
and agreed to the suspension of the running of the statu-
tory period of limitations on assessment or collection for
the period during which the offer should be pending and
for one year thereafter. By said "Offer in Compromise"
the taxpayer tendered the sum of One Hundred Dollars
in [70] settlement of the balance then due, and stated in
said offer that the taxpayer had been without regular in-
come for several years and had subsisted largely upon
borrowed money. With said offer, the taxpayer included
a financial statement which showed his liabilities in the
amount of $28,698.35 in excess of assets. Said offer and
waiver were executed at the request of the Collector of
Internal Revenue, and were filed with the Collector of In-
ternal Revenue at Los Angeles, California, on May 21,
1936. The Collector of Internal Revenue at Los Angeles
transmitted said offer and waiver to the Commissioner of
Internal Revenue, therewith forwarding a copy of the
Tax Collection Waiver filed July 5, 1933.
12.
The waiver executed May 6, 1936 was accepted by the
Commissioner of Internal Revenue in writing on May 29,
1936, and on August 9, 1938, said last mentioned "Offer
in Compromise" was rejected by said Commissioner.
13.
Subsequent to said date of August 9, 1938, no offer
in compromise from the plaintiff was pending or under
72 E. C. Simmons vs.
consideration by the Bureau of Internal Revenue, and
subsequent to said last mentioned date and until October
9, 1945, plaintiff had no correspondence or conferences
with the Government concerning the taxes herein involved,
and to plaintiff's knowledge no attempts were made during
said period to collect said taxes.
14.
On October 9, 1945, the Collector of Internal Revenue
made demand upon plaintiff for the payment of the [71]
balance due on said taxes, and on November 14, 1945,
plaintiff paid said balance of $1,255.18 together with in-
terest amounting to $1,904.09, together with the sum of
fifty cents for the release of the lien created as herein-
before mentioned. A claim for refund for the amount of
said tax and interest so paid was filed by the plaintiff, and
after more than six months during which said claim for
refund was neither accepted nor rejected, this action was
brought.
15.
No notice with respect to revoking the Tax Collection
Waiver executed July 5, 1933 was given by plaintiff.
16.
Under all the circumstances herein shown no unreason-
able time elapsed prior to the date when the Government
collected the taxes herein involved from the plaintiff.
From the foregoing Findings of Fact, the Court draws
the following
Harry C. Westover, etc. 7Z
CONCLUSIONS OF LAW
1.
The Tax Collection Waiver executed by plaintiff on
July 5, 1933 was valid.
2.
Said Tax Collection Waiver of July 5, 1933 was not
revoked or terminated by the execution and acceptance
of the waiver of May 6, 1936. [72]
3.
Said Tax Collection Waiver of July 5, 1933 was not
revoked or terminated by the lapse of time herein.
4.
Said Tax Collection Waiver of July 5, 1933 was opera-
tive at the time said taxes were collected.
5.
The collection of said taxes was not barred by any
statute of limitations.
6.
Plaintiff has not overpaid the taxes and interest involved
herein and is entitled to no relief by his said complaint.
7.
Defendant is entitled to judgment herein with costs.
Dated this 23 day of April, 1948.
JACOB WEINBERGER
United States District Judge
[Endorsed] : Filed Apr. 23, 1948. Edmund L. Smith,
Clerk. [7Z]
74 E. C. Simmons vs.
In the District Court of the United States
Southern District of California
Central Division
No. 5517-W
E. C. SIMMONS,
Plaintiff,
vs.
HARRY C. WESTOVER, Collector of Internal Revenue,
Defendant.
JUDGMENT
The above case came on regularly for trial on February
6, 1947, before the above entitled Court sitting- without aid
or intervention of a jury the plaintiff appearing by Latham
and Watkins by Henry C. Diehl, Esq., and the defendant
appearing by James M. Carter, United States Attorney
for the Southern District of California; George M.
Bryant, Assistant United States Attorney for said Dis-
trict, and Loren P. Oakes, Special Attorney, Bureau of
Internal Revenue; and the trial having proceeded and a
Stipulation of Facts by the parties hereto having been
submitted, and oral evidence on behalf of plaintiff also
having been submitted to the Court for consideration and
decision, and the Court after being fully advised in the
premises and after due deliberation, having rendered its
Opinion herein on February 26, 1948, and having filed its
Findings of Fact and Conclusions of Law and ordered
that judgment be entered in favor of the defendant in
accordance with said Findings and Conclusions; [74]
Now, Therefore, by virtue of the law and by reason of
the Findings and other matters aforesaid, it is considered
and ordered by the Court that the above entitled action be
dismissed and that defendant have judgment for and shall
Harry C. Westover, etc. 75
recover from plaintiff the amount of defendant's costs, to
be taxed by the Clerk of this Court in the sum of $10.00.
Judgment rendered this 26 day of March, 1948.
JACOB WEINBERGER
United States District Judge
Judgment entered Apr. 26, 1948. Docketed Apr. 26,
1948. Book 50, page 403. Edmund L. Smith, Clerk; by
L. B. Figg, Deputy.
Judgment Satisfied 5-18-1948 by flg. satis. Edmund L.
Smith, Clerk U. S. District Court, Southern District of
CaHfornia; by Wm. A. White, Deputy. [75]
[Affidavit of Service by Mail.]
[Endorsed] : Filed Apr. 26, 1948. Edmund L. Smith,
Clerk. [76]
[Title of District Court and Cause]
NOTICE OF APPEAL
Notice Is Hereby Given that E. C. Simmons, plaintiff
above named, hereby appeals to the Circuit Court of Ap-
peals for the Ninth Circuit from the final judgment en-
tered in this action on April 26, 1948.
LATHAM & WATKINS
By Henry C. Diehl
June 21, 1948. [77]
Received copy of the within Notice of Appeal and Ap-
pellant's Designation of Record on Appeal this 21 day of
June, 1948. James M. Carter, U. S. Atty., by Gertrude M.
Johnson, Attorney for Deft.
[Endorsed] : Filed Jun. 21, 1948. Edmund L. Smith,
Clerk. [80]
7^ E. C. Simmons vs.
[Title of District Court and Cause]
CERTIFICATE OF CLERK
I, Edmund L. Smith, Clerk of the District Court of
the United States for the Southern District of California,
do hereby certify that the foregoing pages numbered
from 1 to 81, inclusive, contain full, true and correct
copies of Complaint for Refund of Income Taxes Paid;
Answer; Stipulation of Facts; Stipulation and Order
Amending Stipulation of Facts; Opinion; Minute Order
Entered March 3, 1948; Findings of Fact and Conclu-
sions of Law; Judgment; Notice of Appeal and Appel-
lant's and Appellee's Designations of Contents of Record
on Appeal which, together with copy of Reporter's Tran-
script of proceedings on February 6, 1947, transmitted
herewith, constitute the record on appeal to the United
States Circuit Court of Appeals for the Ninth Circuit.
I further certify that my fees for preparing, compar-
ing, correcting and certifying the foregoing record amount
to $16.50 which sum has been paid to me by appellant.
Witness my hand and the seal of said District Court
this 13 day of July, A. D. 1948.
(Seal) EDMUND L. SMITH
Qerk
By Theodore Hocke
Chief Deputy Clerk
Harry C. Westovcr, etc. 77
[Title of District Court and Cause]
Honorable Jacob Weinberger, Judge Presiding
REPORTER'S TRANSCRIPT OF PROCEEDINGS
February 6, 1947, Los Angeles, California
Appearances :
For the Plaintiff: Latham & Watkins by Henry C.
Diehl, Esq., 1112 Title Guarantee Building, Los Angeles,
California.
For the Defendant: Loren Oakes, Special Attorney,
Bureau of Internal Revenue; and George M. Bryant,
Assistant United States Attorney.
Los Angeles, California, February 6, 1947,
2:00 O'clock P. M.
(Case called by clerk.)
Mr. Diehl: The plaintiff is ready.
Mr. Oakes: The defendant is ready.
Mr. Diehl: If the court please, I think it is advisable
that I make a brief opening statement to apprise you of
the nature of the action. This case involves the alleged
overpayment of 1925 income taxes. The facts are, mostly,
undisputed, I believe.
In October, 1929, the tax was duly assessed. There
is no argument about that. Thereafter came the crash
or that was about the time of the crash, and the plaintiff
was unable to pay the amount in full and he made part
payments through the years until, in 1935, the amount
was reduced to the amount involved in this suit.
On October 15, 1932, the plaintiff filed an offer in
compromise, incorporated in which was a waiver of the
78 E. C. Simmons vs.
statute of limitations for the time which the government
would take to consider the offer in compromise.
On October 18, 1932, this offer in compromise was
rejected.
Thereafter, on July 5, 1933, the plaintiff executed what
is entitled a tax collection waiver, which purports to extend
the statute of limitations indefinitely. [2*]
On March 15, 1934, this waiver was executed by the
Commissioner.
On May 21, 1936, a second offer in compromise was
filed by the taxpayer. This offer also contained a waiver
of the statute of limitations for the period during which
the offer was pending- and for one year thereafter. On
August 9, 1938, this was rejected by the Commissioner.
Thereafter, nothing transpired between this taxpayer
and the government until October of 1945, when the
notice and demand for payment of the tax was presented
to the plaintiff. On November 14th, 1945, he paid the
tax and, on December 11th, he filed a claim for refund.
And, after waiting the six months' period, during which
no action was taken, on June 27, 1946, this action was
filed.
The only issue is whether or not the collection of tax
was barred by the statute of limitations. The plaintiff
says it was and the defendant says it was not, and relies
upon the collection waiver of July, 1933, which purported
to suspend the statute of limitations indefinitely, the
so-called unlimited waiver.
Our theory of the case is, one, that an unlimited waiver
is good for only a reasonable length of time, in any
event, and that the time that has elapsed is much more
than a reasonable length of time; two, that that waiver,
*Page number appearing in original Reporter's Transcript.
Harry C. Westovcr, etc. 79
contained in the second offer in compromise, filed after
the so-called unlimited [3] waiver, superseded the so-called
unlimited waiver, and the government is bound by the
time mentioned in this second offer in compromise.
The Court: Will you repeat that last statement?
Mr. Diehl: That the waiver contained in the second
offer in compromise, which was filed in 1936, supersedes
the so-called unlimited waiver filed in 1933 and sets a
definite time limit in this case, March 13, 1939.
The Court: Is that the one that provides for a year?
Mr. Diehl: Yes; that is, for the period during which
the offer was being considered, plus one year. That
would bar the taxes as of March 13, 1939. Of course,
they were not collected until some six and a half years
later.
We have an additional argument, which has apparently
never been considered in any court, and that is that an
unlimited waiver is not valid in any event for the reason
that the taxes shall be collected within six years after
assessment or within such period as is agreed upon, in
writing, by the Commissioner and the taxpayer. And
our argument will be that the word "period" means a
definite period and not an unlimited period.
Now, as I say, the facts are, mostly, undisputed. The
pleadings contain allegations of fact which are admitted.
In addition to that, we have signed a stipulation of facts
which contains practically all of the rest of the facts
necessary to [4] the case, and I would like to submit the
stipulation at this time, duly signed by counsel for both
sides.
As far as the plaintiff is concerned, we would like to
introduce about 15 minutes of oral testimony by the
plaintiff, and that will be our case.
80 E. C. Simmons vs.
The Court : Isn't that testimony covered in your stipu-
lation of facts?
Mr. Diehl: No; it is not. These are facts which were
not such that the government chose to stipulate to them.
I don't know whether they will be controverted or not.
Mr. Oakes: If your Honor please, I would like to
mention that the statement which has been made by Mr.
Diehl represents a pretty good summary of the matters
which have gone into this statement of facts. We have
tried to make the stipulation run, for the sake of sim-
plicity, in chronological order.
It is true there was an offer made in 1932. This offer,
of course, was rejected during that same year and, hence,
I don't believe either party hereto or the court will find
that that 1932 offer is of any particular relevancy.
However, when we come into the next year, 1933, the
taxpayer did execute a waiver, which is attached to the
stipulation as Exhibit C, and by its precise terms, it is
notice to the government to make an assessment or,
rather, to make collection, at any time. The assessment
had already been made in [5] 1929, so this waiver was
given so that the collection could be made at any time.
Now, had that offer not been given in 1933, the time
would have expired by the applicable periods of limita-
tion. So the purpose of the waiver was so that the gov-
ernment wouldn't have to harass the taxpayer and he has
more time, and, if his financial circumstances change in
due course, his tax liability would be ultimately paid off
and the Commissioner doesn't have to resort to his drastic
remedies of collection, distraint, and so forth. This 1933
unlimited waiver, on which we rely, was signed by the
Commissioner in 1934.
Harry C. Westovcr, etc. 81
The Court : Did that waiver precede the other waiver
or follow it?
Mr. Oakes : This particular waiver, then, is sand-
wiched in between the 1932 offer of compromise and the
1936 offer in compromise.
The Court: And the 1936 offer in compromise lim-
ited the consideration within a year after the acceptance
or rejection of the offer?
Mr. Oakes : The 1936 offer in compromise was made
on a printed form and one of the standard clauses which
appeared in print was that the statute of limitations
should not run while the offer was under consideration
and for one year thereafter.
The Court: And that was rejected?
Mr. Oakes : That was rejected [6]
The Court: You are relying, then, on the unlimited
waiver ?
Mr. Oakes: Which preceded it in 1933.
The Court : What is your contention as to that waiver ?
Mr. Diehl : When we say that the offer of compro-
mise was rejected, we mean the offer in compromise; not
the waiver. It is shown on the form there that the
waiver was accepted by the Commissioner. In other
words, the Commissioner accepts the waiver when the
offer in compromise is filed. Then, he later rejected
the offer in compromise. But that doesn't mean he
rejected the waiver.
Mr. Oakes : As Mr. Diehl says, there is a sentence
on the 1936 offer whereby, as an administrative matter,
the Commissioner states that he will accept the waiver
above set forth and will consider the offer in due course.
Now, on this standard form 656, which was used both
in 1932 and also in 1936, the reverse side provides for
the Collector reporting to the Commissioner as to the
82 E. C. Simmons vs.
status of this account and the receipt of this offer, which
the Collector must transmit to the commissioner in Wash-
ington, D. C. In transmitting this 1936 offer to the
Commissioner in Washington, D. C, the Collector is re-
quired to report whether there are any waivers on file.
By that is meant, obviously, a waiver other than the
waiver set forth on the face of the offer. So that the
Collector reported to the Commissioner, in 1936 [7]
"Here is a 1936 offer in compromise. We forward it
to you. We also have a waiver on file." And he for-
warded a copy of this unlimited waiver which was exe-
cuted three years before.
I mention this because the cases lay considerable stress
upon the intention of the parties, and at least the inten-
tion of the Collector, as the representative of the govern-
ment, was that in forwarding this 1936 offer the situation
was protected by an unlimited waiver which was obtained
in 1933, a copy of which was attached to the 1936 offer.
I realize that opposing counsel will advance legal
arguments that there might have been a superseding
waiver. That is a point which we wish to prove in due
course before your Honor.
The Court: This payment was finally made when?
Mr. Oakes: It wasn't made until 1945, and at that
time we went out and made a notice and demand and,
pursuant to that notice, the taxpayer paid in 1945 what
he, obviously couldn't pay in earlier years when he was
reporting that he was $28,000 in the red.
The Court: That waiver that you rely upon was exe-
cuted when?
Mr. Oakes: In 1933.
The Court: Some 12 years before this?
Mr. Oakes : That is correct.
Harry C. Westover, etc. 83
* The Court: Followed by another waiver and followed
by [8] an ofifer of compromise and an extension of the
limitation period at that time?
Mr. Oakes: I think it is worthy of note that this
1933 waiver was given at a time when there wasn't any
offer in compromise pending whatsoever. So its purpose
was to maintain the status quo. In 1936 that document,
according to the government's position, was for the pur-
pose of submitting an offer in compromise and, as an
incidental, it did have language suspending the running
of the statute of limitations. We think, under the author-
ities, the government was entitled to the specific revoca-
tion of an unlimited waiver and, had there been any such
notice, as a matter of practicality, the Commissioner
would have protected himself before the expiration of
the limitation period.
The Court : Are there any questions arising in relation
to such a payment ? Of course, it is not an overpayment —
Mr. Oakes: I believe the taxpayer would say it is an
overpayment because it is outlawed or barred by the
statute and, conversely, we say it isn't because it is not
outlawed and not barred by the statute of limitations.
The merits of that tax are not in dispute but rather the
issue of the statute of limitations.
Mr. Diehl: If I may, I think the answer to your
Honor's question is that the Internal Revenue Code
defines a payment of taxes, after the statute has expired,
as an overpayment on [9] which the taxpayer is entitled
to a refund. So, if the statute has expired, it is an over-
payment and, if the statute has not expired, it is not an
overpayment.
Mr. Oakes : We believe that it would be an overpay-
ment provided, of course, that the court should decide
84 E. C. Simmons vs.
adversely to the government on the issue of the statute *
of Hmitations.
The Court: Now you wish to proceed with the intro-
duction of your testimony?
Mr. Diehl: Yes, sir.
Mr. Oakes: I have just one more remark to make.
The Court : Go ahead.
Mr. Oakes: I don't beHeve anyone representing the
government has heretofore heard any expression of what
I must say is a rather novel point by Mr. Diehl, that,
because there was an indefinite period prescribed in the
1933 waiver, the 1933 waiver was thereby rendered void.
It would be, certainly, diametrically opposed to the inten-
tion of the parties, when they have a waiver saying that
an assessment can be made at any time, to apply an
interpretation which would say it is no good, even for one
minute, because it is not definite. The courts have had
these unlimited waivers before them and they have been
upheld. So the government, of course, is violently op-
posed to any such radical interpretation of the document
as that.
The Court: I imagine you have authorities in con-
nection [10] with your waivers.
Mr. Oakes : Opposing counsel intimated that that point
hadn't been heretofore urged. It appears he is more
ingenious than any of his predecessors.
The Court: Does a waiver of that kind resemble the
waiver in some of these promissory note matters, that
are unlimited?
Mr. Oakes: We haven't studied any such analogy
but it is a point we would be glad to cover in briefs.
The Court: I don't know whether it is applicable here.
You may proceed, then, with the introduction of your
testimony.
Mr. Diehl: Mr. Simmons.
Harry C. Westovcr, etc. 85
E. C. SIMMONS,
the plaintiff, being first duly sworn, testified as follows:
Direct Examination
By Mr. Diehl:
Q. State your name, please.
A
Q
A
Edward C. Simmons.
You are the plaintiff in this action?
I am.
Q. Mr. Simmons, I refer you to Exhibit A-1 attached
to the stipulation which is on file herein, which purports
to be an offer in compromise, dated July 20, 1932. Do
you recall [11] the circumstances under which that offer
in compromise was filed? A. I do.
Q. At whose request was that offer filed?
A. At the instance of the Internal Revenue Depart-
ment.
The Court : Is that Exhibit 1 ?
Mr. Diehl: That is Exhibit A-1, your Honor.
Q. At the time you executed this offer in compromise,
Exhibit A-1, did you know that it included a waiver of
the statute of limitations, in definite terms?
A. I did.
Q. Now I refer you to Exhibit C attached to the
stipulation, which is a so-called tax collection waiver,
dated July 5, 1933. Do you recall the circumstances
under which that waiver, Exhibit C, was executed and
filed? A. Yes.
The Court: You have asked about A-1. Did you ask
about A-3?
Mr. Diehl: I have skipped A-2, -3, -4 and B.
Q. At whose request was the collection waiver, Ex-
hibit C, filed?
86 E. C. Simmons vs.
(Testimony of E. C. Simmons)
Mr. Oakes: To which the government objects. Here
we have a document which speaks for itself. The two
parties, the taxpayer and the government, have agreed
to this, as indicated by their signatures, and whether the
government requested the [12] taxpayer or whether the
taxpayer requested the government can't have any legal
effect whatsoever or any significance on this document.
They arrived at that agreement and, under the parol
evidence rule, there is no reason to modify it. And,
particularly because of the immateriality and irrelevancy
of that question, the government objects, and there is
no ambiguity there to be explained.
Mr. Diehl: If the court please, the government did
announce the possibility that intent may have a good deal
to do with this case, and we believe these questions are
material in arriving at that intent. Specifically, we believe
it is important to show that the government asked for these
waivers, in order to carry forward and show the intent
of the taxpayer and the government in subsequent deal-
ings. Moreover, we also have the rule of evidence, set
forth by Rule 43(a), that the rules of evidence in the
State where the court is sitting are to be recognized
and evidence is to be admissible if there is any ground
for it. And we think the rule in California that circum-
stances surrounding the execution of a written instrument
make it admissible in evidence is applicable.
The Court: If there is any doubt as to the contents
of the instrument.
Mr. Diehl: There is no doubt as to the contents of
the instrument. We are merely getting at the surround-
ing circumstances and showing the intent of the parties
in all their [13] dealings.
Harry C. Westovcr, etc. 87
(Testimony of E. C. Simmons)
Mr. Oakes: For what purpose? How could there be
any proof concerning circumstances unless there is some-
thing equivocal in this document that needs interpretation?
If there were some other construction before the court,
it might be necessary to enter into the surrounding cir-
cumstances to see. And I believe the document speaks for
itself, and I don't believe there is anything to construe.
The Court : Your contention is that here is a document
that was executed by the taxpayer and that the question
of the intent has some place in the execution of this
document ?
Mr. Diehl: Not particularly in the execution of this
document as particularly in the matter which follows. I
believe, if this so-called unlimited waiver was executed
at the request of the government and subsequently another
document was executed at the request of the government,
that that means the second document shall supersede the
first.
The Court: Isn't that a question of law?
Mr. Diehl: Frankly, I think it is but the government
seems to indicate the intent may have something to do
with this. I am merely trying to anticipate some argu-
ment which the government will put on probably by briefs.
The Court : If there is some understanding between the
parties when the document is executed as to whether they
will replace it or supplant it with another document, then
I think [14] the surrounding circumstances may be intro-
duced, but here I don't know whether the question of
intent has any bearing. The document was executed.
And the man who executed it intends to use it, does
he not?
Mr. Diehl : Yes, sir.
88 E. C. Simmons vs.
(Testimony of E. C. Simmons)
The Court: The same as a promissory note or a
check. Otherwise, he wouldn't have executed the agree-
ment. If this was executed with some intent that is not
disclosed in the document —
Mr. Diehl: As to this particular document, you may
be correct.
The Court: I don't know whether it is admissible or
not to show intent, that is, intent standing alone and not
connected with any other issue. I am inclined to believe
that the document speaks for itself and the question of
intent is immaterial. The objection is sustained.
Q. By Mr. Diehl: Now, Mr. Simmons, relative to
Exhibit D-1 attached to the stipulation of facts, the
exhibit immediately following Exhibit C, which we have
been talking about — A. Yes, sir.
Q. — that was an offer in compromise, dated April
23, 1936. Do you recall the circumstances surrounding
the filing of this offer? A. I do.
Q. At whose request was it filed? [15]
Mr. Oakes : The government wishes to make the same
objection. We think the analogy here is like a contract.
We think it is analogous to a contract because it is signed
by the taxpayer and subsequently signed by the Com-
missioner.
The Court: Would it make any difference at whose
request ?
Mr. Oakes: That is not material, I don't think.
The Court: I don't see any harm in that question.
Mr. Oakes: I am also trying to anticipate as well as
Mr. Diehl. I fear that the taxpayer is going to try and
make capital out of whose request this was, and I believe
the legal results are the same regardless of who re-
quested it.
Harry C. Westovcr, etc. 89
(Testimony of E. C. Simmons)
The Court: That is probably true.
Mr. Oakes: And, if that is so and being immaterial,
I don't want the record cluttered with it.
The Court: I don't think there is any harm in stating
at whose request it was done. He may answer that
question.
A. At the instance of someone in the Internal Rev-
enue Department.
Q. By Mr. Diehl: At the time that this so-called
second offer in compromise. Exhibit D-1, was filed, did
you recall the fact that you had already executed Exhibit
C, the tax collection waiver?
A. I did, indeed, and I was firmly of the opinion —
Mr. Oakes : I believe the government should move
to [16] strike all of his opinion and recollections.
The Court : It may be stricken.
Q. By Mr. Diehl: At the time the second offer in
compromise. Exhibit D-1, was filed, did you know that
the government had already on file a so-called unlimited
waiver?
A. Yes, and I was firmly of the opinion —
Mr. Oakes: I move to strike, again, his opinion in
that regard.
The Court: Just answer the question, and, if your
counsel wants to ask you anything else, he will ask it
and proper objection may be made then.
Q. By Mr. Diehl: Did you intend that the waiver
contained in that second offer in compromise should su-
persede the previously executed tax waiver?
Mr. Oakes : The government objects because counsel is
trying to insert in the record a mere subjective matter of
the state of mind of the witness and we can't interpret
90 E. C. Simmons vs.
(Testimony of E. C. Simmons)
agreements by what was in his mind. And it was never
communicated to the government. Therefore, it is imma-
terial.
The Court: The witness can't answer it. The matter
of intent has no bearing on the subject, I don't think.
I mean it is his state of mind.
Mr. Diehl: That is quite true. Of course, we believe
that the intent is shown in the record.
The Court: Whatever the record shows — [17]
Mr. Diehl: As I say, I am merely anticipating that
the government is going to make certain representations
and we must show the actual intent of the parties aside
from that. If they will stipulate that, I will be glad to
withdraw my question.
The Court: If they do, it will have to be construed
from the documents, I imagine, unless there is some evi-
dence bearing on the subject.
Mr. Diehl : Then, I take it the objection is sustained,
is it?
The Court: The objection is sustained.
Q. By Mr. Diehl: Do you know, Mr. Simmons,
what the local Collector's recommendation was with re-
spect to the second offer in compromise. Exhibit D-1 ?
A. I was 'informed it had gone forward to Washing-
ton with the recommendation that it be accepted.
Q. Now, with reference to Exhibit E, which is the
letter from the Commissioner, dated August 9, 1938,
rejecting the offer in compromise of April 23, 1936,
Exhibit D-1, to the best of your recollection, did you have
any correspondence or discussions with the Treasury
Department on the subject of these taxes from that date
until October of 1945? A. No.
Harry C. Westovcr, etc. 91
(Testimony of E. C. Simmons)
The Court: To which exhibit are you referring?
Mr. Diehl: Exhibit E, the last exhibit. [18]
Q. From the date of that letter until the month of
October, 1945, were any attempts made to collect these
taxes from you?
A. Not that I can recall.
Q. There were, then, no proceedings of any kind, so
far as you recall, pending between you and the govern-
ment from August, 1938, to October, 1945?
A. No, sir.
The Court: What do you mean by "proceedings"?
Mr. Diehl : Well, pending offers in compromise, cor-
respondence or anything relating to these taxes, and no
visits from the Collector in attempting to collect. In
other words, the matter was completely at rest from
August, 1938, to October, 1945.
The Court: Is there any dispute about that?
Mr. Diehl : The stipulation contains only the fact that
there were no offers in compromise pending. I merely
want to get into the record the fact that there was nothing
pending.
Mr. Oakes: The government hereby objects to the
question as immaterial. We had an unlimited waiver
and we can proceed against the taxpayer whenever we
see fit to do so.
The Court: I think he may answer if there was any
correspondence took place or any conferences. It will
be limited to those matters, correspondence or conferences
with any department. [19]
Mr. Diehl : I believe he has answered the question but
I will state it again to be sure.
92 E. C. Simmons vs.
(Testimony of E. C. Simmons)
Q. During the period of August 9, 1938, to October,
1945, did you have any correspondence with the govern-
ment concerning your 1925 income tax?
A. No, sir.
Mr. Oakes : For the purpose of the record, the govern-
ment wishes to repeat the same objection, that these con-
versations are immaterial under our rights under the
unHmited waiver.
The Court: That is between what dates?
Mr. Diehl: Between August 9, 1938, and October —
what was the date of that demand, Mr. Oakes? Do you
know?
Mr. Oakes: I beheve the stipulation says there was a
demand in October, 1945. It is paragraph 16 of the
stipulation.
Mr. Diehl: Yes, October 9, 1945.
Q. During that period, you had no discussions with
any —
The Court: I will rule on that objection. There was
an objection made.
Mr. Oakes: Yes, your Honor. I objected to that.
The Court : The objection is overruled.
Q. By Mr. Diehl: Were there any discussions be-
tween you and any representative of the government,
during that period, regarding your 1925 tax? [20]
Mr. Oakes: The same objection.
A. Not that I can recall.
The Court: Overruled.
Mr. Bryant: Your Honor, the witness answered.
A. Not that I can recall.
Harry C. Westovcr, etc. 93
(Testimony of E. C. Simmons)
Q. By Mr. Diehl: Were any attempts made to collect
the 1925 tax during that period?
Mr. Oakes : The government objects to that as calling
for a conclusion of the witness and it would involve
matters not within his knowledge, and also the ground of
immateriality.
The Court: When you talk about an attempt, that
presupposes some act or something of that kind.
Mr. Diehl: I think it is probably covered by the other
questions anyway, that he had no correspondence or con-
ferences as far as he knew. I will withdraw that question.
You may cross examine.
The Court: I think that question has been formerly
asked, the hrst question; that it was asked when you re-
ferred to Exhibit E, and there was no objection at that
time whether there was any attempt to collect, —
Mr. Diehl : I believe that is correct.
The Court: — if I am not mistaken.
Mr. Oakes: I don't recall, your Honor.
The Court: I have it in my notes here.
Mr. Oakes : That being the case, for the purpose of
the [21] record, I would like to move to strike testimony
with respect to attempts to collect on the ground it calls
for the conclusion of the witness on matters that took
place in government offices, unbeknownst to the taxpayer.
The Court: That motion may be granted. It seems
to me that you gentlemen can stipulate, if between these
dates there had been any correspondence or there had
not been — you might include that in your stipulation, if
there was any correspondence, on both sides, and that
would simplify the situation from a legal standpoint.
94 E. C. Simmons vs.
Mr. Oakes : I am not able to state with certainty what
actually transpired at that time and I would rather leave
the court without anything on that phase.
The Court: Very well. The reason I mentioned that
was to see whether it is possible to submit the entire
matter on an agreed statement of facts.
Mr. Oakes : I want to confer just a moment, if I may.
No cross examination.
Mr. Diehl: The plaintiff rests.
Mr. Oakes : For the purpose of the record, do I under-
stand that the stipulation is now being received for con-
sideration by your Honor?
The Court: I will look at it. Paragraph XVIIL
"Either party hereto may at the time of trial or writing
briefs herein or any other time question the relevancy
and/or [22] materiality of any of the facts or exhibits
herein stipulated. It is further agreed that this stipulation
of facts shall not prejudice the right of either party hereto
to introduce such other and additional evidence as is not
inconsistent with or contrary to the facts herein stipu-
lated."
What is your present attitude as to the relevancy or
materiality of the facts or exhibits stipulated to under
this stipulation?
Mr. Diehl : If the court please —
The Court: I don't want to be put in this position.
I don't want to begin the consideration of a case and have
someone, at the last moment, in his brief, object to the
relevancy and upset perhaps my whole line of thinking
on the solution of the case.
j\Ir. Diehl: Frankly, my feeling is that Exhibits A-1,
-2, -3 and -4 and Exhibit B, are probably relevant except
Harry C. Westovcr, etc. 95
to this extent: I will restrict that as far as A-2, -3, and
-4 are relevant. Exhibit A-1 is relevant because it con-
tains a waiver of the statute which it is necessary to use
in computing when the collection became barred. Exhibit
B is material because it shows the length of time during
which this particular offer was being considered and is
necessary to a computation of the extension. Exhibit C
is, of course, quite material. It is the government's
whole case. Exhibit D-1 is also very material because
that is our case, or [23] a good part of it. Our claim is
that Exhibit D-1 supersedes Exhibit C. D-2 is material,
I take it, because of its reference to the preceding waiver.
D-3 and D-4, I believe, are not material. D-5, I believe
we will both agree, is material, we for one reason and the
government for another. Exhibit E is also material in
that it shows the length of time during which the offer
was being considered. The facts stated in the stipulation
— I believe there are some there which are not material
and I don't believe they have any bearing on the case one
way or the other and that they shouldn't upset anybody.
They are just preliminary to what goes on here. The only
argument in the case is was the collection barred by the
statute of limitations. We admit the taxes were properly
assessed.
Mr. Oakes : Your Honor, I believe it would be unwise
to strike any paragraph or sentence from the stipulation
and, likewise, inadvisable to strike any of these exhibits
because they give the continuity and they give the chrono-
logical story of what happened, and it wouldn't give your
Honor a clear picture of the history if anything were
stricken. And as to these offers in compromise, we now
give your Honor the picture. When we photostat some-
thing, obviously, we have to photostat both sides and,
96 E. C. Simmons vs.
therefore, get two sheets. Now, just by illustration, A-1
in the original, which I have before me, is just one sheet
of matter, written on both sides, [24] and I don't believe
that, when we place in evidence an offer in compromise,
it would be fair or complete to place in evidence anything
less than the entire document.
The Court: Is Exhibit A-2 on the reverse side of
Exhibit A-1 ?
Mr. Oakes : Yes, your Honor.
The Court: Does the stipulation so indicate?
Mr. Oakes : Yes, I think it is fairly clear that took
place.
The Court: What is wrong with that?
Mr. Diehl : Not a thing. The fact of the matter is I
don't object to the inclusion of any evidence. I think it
can all be in there and probably should be to show the
whole story.
The Court: You have only one thing in this case,
just one issue, the question as to whether or not this
agreement can extend the statute indefinitely?
Mr. Diehl: That is right.
The Court: Everything else is merely explanatory, I
imagine.
Mr. Diehl: I don't really think your Honor will have
any trouble regardless of how much we may say in our
briefs about something being irrelevant and immaterial.
And I will withdraw my objections.
The Court: You withdraw your objection? [25]
Mr. Diehl: Yes.
The Court: Then may it be understood — or what is
the understanding with respect to Paragraph VHI?
Shall this matter be submitted to the court, subject to
objections to be made later on, or not?
Harry C. Westover, etc. 97
Mr. Bryant: Does your Honor mean Paragraph
XVIII?
The Court: Yes; Paragraph XVIII.
Mr. Oakes: If your Honor wants it submitted, I pre-
sume both sides could agree that this is all that is going
to appear before your Honor. There is no further evi-
dence on either side. The government doesn't have any
evidence now and is willing to waive the right to present
any further evidence.
The Court: What I referred to is this. While this
is a stipulation, yet it isn't, because this paragraph recites
that "Either party may, at the time of trial or writing
briefs herein or any other time question the relevancy
and/or materiality of any of the facts or exhibits herein
stipulated." The court is unwilling to accept the conclusion
of a trial in that form. That doesn't conclude the trial.
Mr. Diehl : I am perfectly willing to strike that portion
of the stipulation.
Mr. Oakes : We will join with opposing counsel in that
suggestion.
The Court: Paragraph XVIII may be stricken from
the [26] stipulation of facts, may it?
Mr. Diehl: I think the entire paragraph. We have
introduced additional evidence and it is in. I think the
whole paragraph should be stricken.
The Court: I think this may be done by additional
stipulation instead of striking it, without making a phys-
ical striking at this time. Or would you prefer to strike
it out now by running lines through it?
Mr. Oakes: In the event of possible appeal, it might
be simpler to have it stricken, the entire Paragraph XVIII,
and we could stipulate the clerk could strike Paragraph
XVIII.
98 E. C. Sinvmons vs,
Mr. Diehl: That is agreeable.
The Court: It is agreeable to both sides that Para-
graph XVIII may be stricken from the stipulation, is
that correct?
Mr. Diehl: Yes, that is correct.
Mr. Oakes : That is correct, your Honor.
The Court: It is so ordered. However, that doesn't
take with it the striking of the testimony offered by the
plaintiff in this case today.
Mr. Oakes: Yes; that is what the government has in
mind, that this Paragraph XVIII relates exclusively to
the preceding seventeen paragraphs in the stipulation and
does not relate to the transcript wherein the taxpayer
testified.
The Court: Then, the testimony as submitted today
may [27] stand as having been —
Mr. Diehl: Yes; I think there is no difficulty there.
It merely states "the following facts are true."
Mr. Oakes: Again for the purposes of the record, the
taxpayer's testimony stands subject to the rulings your
Honor has made to certain portions ?
The Court: Yes. I think we had better cover that
with a stipulation, a written stipulation. You can cover
that with a written stipulation, can you not?
Mr. Oakes: Yes, your Honor.
The Court : Then, that will be in the file and that will
constitute a better record.
Mr. Oakes : I will prepare it and forward it and send
a copy to counsel.
The Clerk: I have already stricken it, your Honor.
The Court: You gentlemen may initial this and the
record may show that the striking of this paragraph is
covered by a written stipulation to be filed.
Harry C. Westover, etc. 99
Mr. Oakes : Does your Honor want the record to show
that you are receiving this in evidence or that it is filed?
The Court: This stipulation may be received in evi-
dence. That is agreeable to both sides, is it?
Mr. Diehl: Yes, your Honor.
Mr. Oakes: And I believe the plaintiff has heretofore
rested, and, now that the submission is in evidence,
the [28] government will accordingly rest. The defend-
ant rests.
The Court: We should have arguments and briefs. I
imagine you would like to file written arguments and
briefs.
Mr. Diehl: If the court please, I think probably we
should confine it to written arguments and briefs and not
attempt any oral arguments at this time.
Mr. Oakes: May I suggest, your Honor, I believe the
usual practice is that the taxpayer can file an opening
brief and we can reply and then he can file a reply brief
and, after the issues are somewhat clarified by that pro-
cess, if your Honor would desire it, then we could come in
and discuss it?
Mr. Diehl : That is all right.
The Court: That course may be followed. How long
do you want to file your opening brief and argument?
Mr. Diehl : 10 days.
The Court: Do you want longer?
Mr. Diehl: I think I can do it in 10 days.
The Court : All right. And you want 10 days, do you?
Mr. Oakes : Mr. Bryant just reminded me that our
docket is a little heavy. Would 20, 20 and 10 be more
feasible?
Mr. Diehl: That is all right, your Honor.
The Court: Very well; 20, 20 and 10, will be all right.
100 E. C. Simmons vs.
The Clerk: That will run into the criminal calendar,
your Honor. [29]
Mr. Oakes : Those are the dates on which we will get
in those three briefs?
The Court: I couldn't take this matter under submis-
sion during- the time I have the criminal calendar. I begin
that on the 29th of March.
Mr. Oakes: If it is agreeable to Mr. Diehl, any sub-
sequent date after your criminal calendar we will appear
for any oral argument.
The Court: I may not require oral arguments.
Mr. Oakes : We can leave that in this way —
The Court: I don't think this is a very complicated
situation. It is purely a question of law.
Mr. Diehl: That is correct.
The Court : There are no facts that seem to control the
situation other than what you have set out in your stipula-
tion. We can set it down for March 31st for further
presentation or arguments and I can continue that until —
I have the criminal calendar in April, May and June.
Mr. Diehl : The plaintiff is wilHng to shorten the
period within which to file briefs if that will help the
situation.
Mr. Oakes : If it will expedite the matter, your Honor,
15 and 15 and 7 or something like that, which will put
us through a lot sooner.
The Court: It won't make any difference to me. [30]
Mr. Oakes : Or two weeks, two weeks and one week.
The government does feel that, as this case will require
your Honor to interpret unlimited waivers, and the
government has had a great many of them decided, there
could be an important precedent and possibly it might
require a careful presentation. And we would like to
Harry C. Westover, etc. 101
see it set for oral argument as well as thorough briefing,
and with that in mind —
The Court: That is right. After you have filed your
arguments and briefs, I may want some oral argument
following that.
Mr. Oakes : And the government would like to present
it also orally at that time as well as giving our views in
written form.
The Court: I will be pretty busy with the criminal
calendar. So I won't have much time to digest matters.
Follow the course that has been outlined, 20, 20 and 10,
and we will put it on the calendar for March 31st for
oral argument. I think I will have time on that day to
take the civil calendar in the afternoon.
Mr. Bryant: Is this matter at 2 :00 p. m., your Honor?
The Court: 2:00 p. m., on March 31st. Do you want
today's record written up?
Mr. Bryant: Yes, your Honor. That will be re-
quested.
Mr. Diehl : And the plaintiff also.
The Court: And will you see that the court is fur-
nished [31] with a copy?
Mr. Bryant : The government cannot furnish a copy,
your Honor. However, there will be one in the clerk's
file as long as one is ordered by either party.
The Court : Then the court can resort to the one on file.
(Recess.)
[Endorsed] : Filed Jul. 13, 1948. Edmund L. Smith,
Clerk. [32]
1^2 E. C. Simmons vs.
[Endorsed]: No. 11973. United States Circuit Court
of Appeals for the Ninth Circuit. E, C. Simmons, Ap-
pellant, vs. Harry C. Westover, Collector of Internal
Revenue, Appellee. Transcript of Record. Upon Appeal
From the District Court of the United States for the
Southern District of California, Central Division.
Filed July 14, 1948.
PAUL P. O'BRIEN
Qerk of the United States Circuit Court of Appeals for
the Ninth Circuit
Harry C. We stover, etc. 103
In the United States Circuit Court of Appeals
for the Ninth Circuit
Docket No. 11973
E. C SIMMONS,
Appellant,
vs.
HARRY C. WESTOVER, Collector of Internal Revenue,
Appellee.
STATEMENT OF POINTS AND DESIGNATION
OF PARTS OF RECORD TO BE PRINTED
To the Clerk of the United States Circuit Court of
Appeals for the Ninth Circuit:
I.
STATEMENT OF POINTS
Appellant intends to rely upon the following points:
(1) The District Court erred in entering judgment for
the appellee.
(2) The District Court erred in failing to enter judg-
ment for appellant in the amount of $3,159.27 as prayed
for, plus interest and costs of suit.
(3) The District Court erred in failing to find or con-
clude that appellant had overpaid his federal income taxes
and interest thereon for the calendar year 1925 in the
amount of $3,159.27.
(4) The District Court erred in failing to find or con-
clude that the collection from appellant by appellee of
$3,159.27 in federal income taxes and interest for the
calendar year 1925 was, on the date of said collection,
to-wit, November 14, 1945, barred by the provisions of
Section 276(c) of the Internal Revenue Code (26 U. S.
C. A., Section 276(c)).
104 E. C. Simmons vs.
(5) The District Court erred in failing to find or con-
clude that the Tax Collection Waiver dated July 5, 1933
(Exhibit C attached to the Stipulation of Facts), was
void ab initio.
(6) The District Court erred in failing to find or
conclude that said Tax Collection Waiver (Exhibit C),
if not void ab initio, was effective for only a reasonable
length of time and that the time elapsed from the date
thereof until the date of collection of the tax and interest
for the calendar year 1925 was more than a reasonable
length of time.
(7) The District Court erred in failing to find or con-
clude that said Tax Collection Waiver (Exhibit C), if
not void ab initio, was, in any event, superseded and ren-
dered no longer effective by the provisions of the Offer in
Compromise dated April 23, 1936 (Exhibits D-1 and D-2
attached to the Stipulation of Facts).
11.
DESIGNATION OF PARTS OF RECORD TO BE
PRINTED
Appellant respectfully submits that all of the record
on appeal, as certified to you, will be necessary for the
consideration of the points upon which appellant intends to
rely. Accordingly, appellant requests you to have printed
the entire record on appeal in this case.
LATHAM & WATKINS
By Henry C. Diehl
1112 Title Guarantee Building
Los Angeles 13, California
Attorneys for Appellant
[Affidavit of Service by Mail.]
[Endorsed]: Filed Aug. 2, 1948. Paul P. O'Brien,
Clerk.
m>mEl^^i,!^.M''' . .:; ,^
No. 11973.
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
<
E. C Simmons,
Appellant,
vs.
Harry C. Westover, Collector of Internal Revenue,
Appellee.
BRIEF FOR APPELLANT.
Latham & Watkins,
Dana Latham,
Henry C. Diehl,
1112 Title Guarantee Building, Los Angeles 13,
Attorneys for Appellant.
OCT '■ 'J 1949
Pqrker & Company, Law Printers, Los Angeles. Phone TR- 5206.
^i-^'^
TOPICAL INDEX
PAGE
Jurisdiction 1
Opinion below 2
Issues involved 2
Statutes involved 2
Statement of facts 5
Specification of errors 10
Summary of argument 11
Outline of argument 12
Argument 13
A. Legislative history and general principles 13
B. The tax collection waiver of July 5, 1933. was void
ab initio 16
C. The tax collection waiver of July 5, 1933, was superseded
and terminated by the limited waiver of May 21, 1936.— 17
D. The tax collection waiver of July 5, 1933, was effective
only for a reasonable time 23
Conclusion 26
TABLE OF AUTHORITIES CITED
Cases page
Atlantic Mills of Rhode Island v. United States, 3 Fed. Supp.
699 19, 20, 21
Cunningham Sheep & Land Co., 7 B. T. A. 652 17
Farmers Union State Exchange, 30 B. T. A. 1051 19, 25
Frost, Herman, v. Commissioner, 23 B. T. A. 411 23
Gay, D. J., v. Commissioner, 31 B. T. A. 580 15
Greylock Mills v. Commissioner, 31 F. 2d 655 24
Greylock Mills v. White, 63 F. 2d 866 24
Helvering v. Ethel D. Co., 70 F. 2d 761 18, 24
Loeser, Nathan, v. Commissioner, 27 B. T. A. 601 23
Union Shipbuilding Co. v. Commissioner, 43 B. T. A. 1143 15
United States v. Fischer, 93 F. 2d 488 20, 21, 22
Statutes
Federal Rules of Civil Procedure, Rule 73(a) 2
Internal Revenue Code, Sec. 3770(a) (26 U. S. C. A., Sec.
3770 (a) ) 3
Internal Revenue Code, Sec. 3770(a)(2) 11
Internal Revenue Code, Sec. 3772 (26 U. S. C. A., Sec. 3772).... 4
Judicial Code, Sec. 24(20) (28 U. S. C. A., Sec. 41(20)) 1
Judicial Code, Sec. 128 (28 U. S. C. A., Sec. 225) 2
Revenue Act of 1918, Sec. 250(d) 13
Revenue Act of 1926, Sec. 278 2
Revenue Act of 1926, Sec. 278(d) 8, 9, 10, 13, 16
Revenue Act of 1926, Sec. 284 (26 U. S. C. A., Internal Reve-
nue Acts, p. 220) 3
Revenue Act of 1928 (26 U. S. C. A., Internal Revenue Acts,
p. 209) 2
PAGE
Revenue Act of 1928, Sec. 276(c) 13
United States Code Annotated, Title 26, Internal Revenue Acts 13
United States Code Annotated, Title 26, Sec. 276, Historical
Note 13
Textbooks
Bouvier's Law Dictionary 16
17 Corpus Juris, p. 751 15
Z7 Corpus Juris, p. 684 14
Cumulative Bulletin, 1939-1, Part 2, pp. 241, 260, Ways and
Means Committee Report 14
Cumulative Bulletin, 1939-1, Part 2, p. 288, Finance Committee
Report 14
Funk & Wagnalls Practical Standard Dictionary 16
Webster's New International Dictionary, Unabridged Second
Edition (1947) 16
No. 11973.
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. Simmons,
Appellant,
vs.
Harry C. Westover, Collector of Internal Revenue,
Appellee.
BRIEF FOR APPELLANT.
Jurisdiction.
This appeal involves an alleged overpayment of Federal
income taxes for the calendar year 1925. The taxes and
interest involved, in the amount of $3,159.27, were paid
to appellee by appellant on November 14, 1945, and a claim
for the refund thereof was filed with appellee by appellant
on December 11, 1945.
Thereafter, on June 27, 1946, more than six months
having elapsed during which time said claim for refund
was neither approved nor rejected, the complaint herein
[Tr. 2-6] was filed pursuant to section 24(20) of the
Judicial Code as amended (28 U. S. C. A., Sec. 41(20)).
The judgment of the District Court of the United
States for the Southern District of California, Central
— 2—
Division, in favor of the appellee, was entered on April
26, 1948 [Tr. 75], and this appeal is taken pursuant to
section 128 of the Judicial Code as amended (28 U. S.
C. A., Sec. 225). The Notice of Appeal was filed on June
21, 1948 [Tr. 75] pursuant to Rule 73(a) of the Federal
Rules of Civil Procedure.
Opinion Below.
The only previous opinion rendered in this cause is the
opinion of the District Court [Tr. 41-67] reported in 76
Fed. Supp. 442.
Issues Involved.
Was the collection, on November 14, 1945, by appellee
from appellant of $3,159.27 in Federal income taxes and
interest for the calendar year 1925 barred by the statute
of limitations on collection with the result that appellant
has overpaid his taxes and interest for said year and is
entitled to the refund thereof with interest as provided by
law.
Statutes Involved.
(1) Section 278 of the Revenue Act of 1926, as
amended by the Revenue Act of 1928 (26 U. S. C. A.,
Internal Revenue Acts, page 209) provides in part as fol-
lows:
"(d) Where the assessment of any income, excess-
profits, or war-profits taxes imposed by this title or
by prior Act of Congress has been made (whether
before or after the enactment of this Act) within the
period of limitation properly applicable thereto, such
— 3—
tax may be collected by distraint or by a proceeding
in court (begun before or after the enactment of this
Act), but only if begun (1) within six years after
the assessment of the tax, or (2) prior to the expira-
tion of any period for collection agreed upon in writ-
ing by the Commissioner and the taxpayer before the
expiration of such six-year period. The period so
agreed upon may be extended by subsequent agree-
ments in writing made before the expiration of the
period previously agreed upon."
(2) Section 3770(a) of the Internal Revenue Code (26
U. S. C. A., Sec. 3770(aj) provides in part as follows:
"(2) Assessments and Collections After
Limitation Period. — Any tax (or any interest,
penalty, additional amount, or addition to such tax)
assessed or paid after the expiration of the period of
limitation properly applicable thereto shall be consid-
ered an overpayment and shall be credited or refunded
to the taxpayer if claim therefor is filed within the
period of limitation for filing such claim."
(3) Section 284 of the Revenue Act of 1926 (26 U. S.
C. A., Internal Revenue Acts, p. 220) provides in part as
follows :
"(b) Except as provided in subdivisions (c), (d),
(e) and (g) of this section —
(1) No such credit or refund shall be allowed or
made after three years from the time the tax was
paid in the case of a tax imposed by this Act, nor
after four years from the time the tax was paid in
the case of a tax imposed by any prior Act, unless
before the expiration of such period a claim therefor
is filed by the taxpayer; and
(2) The amount of the credit or refund shall not
exceed the portion of the tax paid during the three
or four years, respectively, immediately preceding the
filing of the claim, or if no claim was filed, then dur-
ing the three or four years, respectively, immediately
preceding the allowance of the credit or refund."
(4) Section 3772 of the Internal Revenue Code (26
U. S. C. A., Sec. 3772) provides in part as follows:
"(a) Limitations. —
(1) Claim. — No suit or proceeding shall be main-
tained in any court for the recovery of any internal
revenue tax alleged to have been erroneously or
illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or
of any sum alleged to have been excessive or in any
manner wrongfully collected until a claim for refund
or credit has been duly filed with the Commissioner,
according to the provisions of law in that regard, and
the regulations of the Secretary established in pursu-
ance thereof.
(2) Time. — No such suit or proceeding shall be
begun before the expiration of six months from the
date of filing such claim unless the Commissioner
renders a decision thereon within that time, nor after
the expiration of two years from the date of mailing
by registered mail by the Commissioner to the tax-
payer of a notice of the disallowance of the part of
the claim to which such suit or proceeding relates."
Statement of Facts.
This proceeding was submitted to the District Court on
the pleadings, a stipulation of facts and certain exhibits
attached thereto [Tr. 11-40], and the oral testimony of the
appellant. The appellee introduced no evidence indepen-
dent of that contained in the stipulation of facts.
The facts here involved, as revealed by the record and
as found by the District Court [Tr. 68-72] may be sum-
marized as follows:
(1) On or about October 19, 1929, there was as-
sessed against the appellant an income tax deficiency
for the calender year 1925 in the net amount of
$3,472.06, after the allowance of certain credits re-
sulting from overassessments for other years. [Tr.
11, 24, 29, 36 and 41.]
(2) Appellant made payments from time to time
until, on August 15, 1933, the balance due on said tax
was $1,255.18, exclusive of interest accruing subse-
quent to October 19, 1929. [Tr. 3, 8, 12, 34, 36, 41
and 69.]
(3) On August 15, 1932, appellant filed with the
Collector of Internal Revenue at Los Angeles, Cali-
fornia, an "Offer in Compromise" on Treasury De-
partment Form 656, which contained a waiver, with
respect to the statute of limitations, which provided
that the appellant, "in the event of the rejection of
the offer, expressly consents to the extension of any
statute of limitations affecting the collection of the
liabiltiy sought to be compromised by the period of
time (not to exceed two years) elapsed between the
date of the filing of this offer and the date on which
final action thereon is taken." [Tr. 12-13, 18-27, 41-
42 and 69.] This document will be sometimes here-
inafter referred to as "first offer."
(4) This first offer and waiver were filed at the
request of the Collector of Internal Revenue. [Tr.
42, 69 and 85.] The waiver was accepted in writing
by the Commissioner of Internal Revenue on August
25, 1932 [Tr. 13, 21, 42 and 70], and the offer in
compromise was rejected in writing by the said Com-
missioner on October 18, 1932. [Tr. 14, 28, 42 and
70.]
(5) On July 5, 1933, the appellant executed a
Treasury Department form entitled "Tax Collection
Waiver," sometimes referred to as an "unlimited
waiver," which provided that the taxes assessed for
1925 "may be collected ... by distraint or by a
proceeding in court begun at any time." [Tr. 14, 29,
42 and 70.] The said Tax Collection Waiver was
executed at the request of the Collector of Internal
Revenue [Tr. 42 and 70], and was accepted in writ-
ing by the Commissioner of Internal Revenue on
March 5, 1934. [Tr. 14, 29,42 and 70.]
(6) At the time said Tax Collection Waiver was
filed, the statute of limitations on collection of the
taxes involved herein, as extended by the waiver con-
tained in the first offer, had two years, five months,
and seventeen days yet to run. There was, therefore,
no apparent reason for requesting it at that time.
There was no consideration for the waiver, since no
offers in compromise or other proceedings were pend-
ing at that time.
— 7—
(7) On June 11, 1934, the Collector of Internal
Revenue abated as uncollectible the balance of
$1,255.18 owed by appellant at that date. [Tr. 34,
last line on page.]
(8) On May 21, 1936, appellant filed with the
Collector of Internal Revenue at Los Angeles, Cali-
fornia, another ''Offer in Compromise" on Treasury
Department Form 656 which contained a waiver,
with respect to the statute of limitations, which pro-
vided that the appellant "agrees to the suspension of
the running of the statutory period of limitations on
assessments and/or collection for the period during
which this offer is pending and for one year there-
after." [Tr. 14-15, 30-38, 42-43 and 70-71.] This
document will be sometimes hereinafter referred to as
"second offer."
(9) This second offer and waiver were filed at the
request of the Collector of Internal Revenue. [Tr,
43, 71 and 89.] The waiver was accepted in writing
by the Commissioner of Internal Revenue on May 29,
1936 [Tr. 15, S3, 43 and 71], and the offer in com-
promise was rejected in writing by the said Commis-
sioner on August 9, 1938. [Tr. 16, 38-39, 43 and
71.]
(10) During the period from August 9, 1938, the
date on which the second offer of appellant was re-
jected by the Commissioner of Internal Revenue, to
October 9, 1945, the date on which demand for pay-
ment was made by appellee, there were no offers in
compromise pending or under consideration by the
Bureau of Internal Revenue [Tr. 16, 43, 71-72 and
90-93], the appellant had no correspondence or con-
ferences with the Government concerning the taxes
involved herein, and the appellee made no attempts to
collect said taxes from the appellant. [Tr. 43, 72 and
90-93.]
(11) On October 9, 1945, the appellee made de-
mand upon the appellant for the payment of the bal-
ance of said taxes plus interest [Tr. 16, 43 and 72]
and on November 14, 1945, the appellant paid to the
appellee said balance of $1,255.18 together with in-
terest in the amount of $1,904.09, or a total of
$3,159.27. [Tr. 3, 7, 16, 43 and 72.]
(12) On December 11, 1945, the appellant filed
with the appellee a claim for the refund of said tax
and interest and on June 27, 1946, after more than
six months had elapsed, during which time said claim
was neither approved nor rejected, the complaint here-
in was filed. [Tr. 3-6, 10, 43 and 72.]
(13) In the absence of a waiver of the statute of
limitations, the collection of the taxes involved herein
would have been barred by section 278(d) of the
Revenue Act of 1926, supra, on October 19, 1935,
six years from the date of assessment of said taxes.
(14) The first offer, by its terms extended the
statutory period of limitations on collection two
months and three days, the time elapsed from the date
of filing, August 15, 1932, to the date of rejection,
October 18, 1932.
(15) The second offer, by its terms, suspended the
running of the statutory period of limitations on col-
lection for three years, two months, and nineteen
days, the time elapsed from the date of filing, May
21, 1936, to the date of rejection, August 9, 1938,
plus one year.
(16) The appellant's case in the court below was
based upon the allegation that the collection of the
tax was, on and before November 14, 1945, barred
by the statute of limitations on collection and that the
payment thereof constituted an overpayment which
should be refimded. [Tr. 3.]
(17) The appellee's defense in the court below was
based upon the allegation that the appellant had
waived the statute of limitations and that the collec-
tion of the tax was, therefore, not barred on Novem-
ber 14, 1945. [Tr. 10.]
(18) Unless the Tax Collection Waiver [Tr. 29]
was in effect on November 14, 1945, the collection of
said tax and interest was clearly barred by the stat-
ute of limitations, for the reason that the six-year
period provided for by section 278(d) of the Revenue
Act of 1926, supra, as extended by the first offer, had
expired on December 22, 1935. The decision in this
case is, therefore, dependent entirely upon a determi-
nation as to the validity and/or effect, as of Novem-
ber 14, 1945, of said Tax Collection Waiver.
—10—
Specification of Errors.
(1) The District Court erred in concluding that the
Tax Collection Waiver executed by appellant on July 5,
1933, was valid. Said waiver did not conform to the pro-
visions of law authorizing waivers in that it purported to
waive the statute for all time, whereas section 278(d) of
the Revenue Act of 1926 as amended, supra, requires that
waivers be for a definite period.
(2) Assuming, but not conceding, that the Tax Col-
lection Waiver of July 5, 1933, was not void ab initio, the
District Court erred in concluding that said waiver was
not revoked, superseded, or terminated by the execution
and acceptance of the waiver contained in the Offer in
Compromise filed on May 21, 1936.
(3) Assuming, but not conceding, that the Tax Col-
lection Waiver of July 5, 1933, was not void ab initio and,
further, that it was not revoked, superseded, or terminated
by the waiver of May 21, 1936, the District Court erred in
finding that no unreasonable time elapsed prior to the date
when the Government collected the taxes herein involved
from the appellant, and in concluding that said Tax Col-
lection Waiver was not rendered inoperative by the lapse
of time. The period of more than sixteen years from the
date of assessment, October 19, 1929, to the date of collec-
tion, November 14, 1945, was manifestly unreasonable
and the District Court's finding of fact on this point is
wholly unsupported by the evidence.
(4) The District Court erred in concluding that the
collection of the taxes involved was not barred by the
statute of limitations. The six-year statutory period plus
—11—
any and all valid extensions thereof expired many years
prior to the date of collection.
(5) The District Court erred in concluding- that the
appellant has not overpaid the taxes and interest involved
herein and is entitled to no relief by his complaint. The
payment of taxes after the expiration of the statutory
period of limitations constitutes an overpayment as de-
fined by section 3770(a)(2) of the Internal Revenue
Code, supra.
(6) For all the reasons above set forth, the District
Court erred in entering judgment against the appellant
and in favor of the appellee.
Summary of Argument.
The taxes involved herein were assessed on October
19, 1929. They were collected on November 14, 1945.
The applicable statutory period of limitations expired on
October 19, 1935. Unless the statute of limitations was
extended by waiver to November 14, 1945, the payment
constitutes an overpayment which must be refunded.
Appellant executed and the Commissioner accepted
three purported waivers. The first and last contained
definite time limitations but the second — the Tax Collec-
tion Waiver of July 5, 1933 — purported to waive the
statute of limitations for all time.
Giving the limited waivers their maximum possible
effect, the statutory period of limitations as extended
would have expired more than six years prior to the date
the taxes were collected; hence our argument will be con-
fined to the question of the validity and effect of the Tax
Collection Waiver of July 5, 1933. The discussion will
—12--
cover not only the date when given, July 5, 1933, but also
the date of collection more than twelve years later, No-
vember 14, 1945. This argument will be presented in
three alternatives, a favorable decision on any one of
which will compel a reversal of the judgment of the Dis-
trict Court. They are as follows:
1. The Tax Collection Waiver of July 5, 1933,
was void ab initio^ hence of no effect at any time.
2. The Tax Collection Waiver of July 5, 1933, if
not void ab initio, was revoked, superseded, or termi-
nated by the filing and acceptance of the limited
waiver contained in the Offer in Compromise filed on
May 21, 1936.
3. The Tax Collection Waiver of July 5, 1933,
if neither void ab initio nor superseded and termi-
nated by the subsequent, limited waiver, was effective
only for a reasonable length of time and the time
which elapsed from the filing thereof until the collec-
tion of the taxes — more than twelve years — ^was
manifestly unreasonable.
Outline of Argument.
A. LEGISLATIVE HISTORY AND GENERAL PRINCIPLES.
B. THE TAX COLLECTION WAIVER OF JULY 5, 1933, WAS
VOID AB INITIO.
C. THE TAX COLLECTION WAIVER OF JULY 5, 1933, WAS
REVOKED, SUPERSEDED, OR TERMINATED BY THE SUBSE-
QUENT LIMITED WAIVER.
D. THE TAX COLLECTION WAIVER OF JULY 5, 1933, WAS
EFFECTIVE ONLY FOR A REASONABLE TIME, AND THAT PE-
RIOD EXPIRED LONG PRIOR TO NOVEMBER 14, 1945.
—13—
ARGUMENT.
A. Legislative History and General Principles.
Prior to the Revenue Act of 1918, there was no Hmi-
tation on the time within which taxes might be collected.
Section 250(d) of that Act provided a limit of five years
from the due date of the return upon both assessment and
collection of the tax. Section 250(d) of the 1921 Act
contained a similar provision but measured the time from
the filing date instead of the due date of the return.
The 1924 Act contained separate limitation provisions
for assessment and for collection, the latter being covered
by Section 278(d) which provided for collection "by dis-
traint or by a proceeding in court, begun within six years
after the assessment of the tax."
Section 278(d) of the 1926 Act provided for collection
by distraint or by a proceeding in court, "but only if be-
gun (1) within six years after the assessment of the tax,
or (2) prior to the expiration of any period for collection
agreed upon in writing by the Commissioner and the tax-
payer." This section of the 1926 Act is, by its terms,
applicable to taxes for 1925.
The 1928 Act changed the section number to 276(c),
added the sentence providing for the extension of the
agreed period, and there has been no change in the section
since that time. See Historical Note to 26 U. S. C. A.,
Sec. 276 and volume "Title 26, Internal Revenue Acts."
The House version of the Revenue Act of 1924 con-
tained no limitation on collection. The Ways and Means
—14—
Committee Report, found in Cumulative Bulletin, 1939-1
(Part 2), page 241, explains their attitude on this subject
as follows, at page 260:
". . . The purpose of a limitation upon assess-
ments is to assure the taxpayer that, after the period
has run and no assessment has been made, no taxes
may be collected from him. If, however, the assess-
ment is made within the prescribed period, the assess-
ment is comparable to a judgment at law and should
remain alive until the tax is paid."
However, the Senate version, to which the House ac-
quiesced, inserted the six-year limitation, with the fol-
lowing explanation by the Finance Committee in its report
at page 288 of the above-mentioned Bulletin :
". . . This subdivision in the House bill au-
thorized the collection at any time. ... In order
to protect the taxpayer further, a limitation of six
years after the assessment of the tax has been placed
upon proceedings in court and distraint for its col-
lection. At the end of such period, the taxpayer is
assured that his tax liability is finally determined."
The intention of Congress to suppress stale tax claims
is obvious.
The purpose of a statute of limitations is to suppress
and eliminate stale claims and the question whether the
claim had any merit in the first instance is immaterial.
37 C. J. 684.
—15—
A written instrument is to be construed most strongly
against the party preparing it and this rule is peculiarly
applicable where a printed form is used.
17 C J. S. 751.
It is a well settled principle of income tax law that
doubts as to a waiver's effectiveness must be resolved
against the government.
D. J. Gay v. Commissioner, 31 B. T. A. 580, 581
(1934);
Union Shipbuilding Co. v. Commissioner, 43 B. T.
A. 1143, 1147 (1941).
The court below dismisses the Gay and Union Ship-
building cases with the comment that they differ on their
facts and are of no assistance in determining the issues
herein. [Tr. 46.] It is true that the facts are not
parallel, but that does not affect the force of the general
rule of law expounded therein that doubts as to a waiver's
effectiveness must be resolved against the government.
The court then proceeds to a brief discussion of cases
which hold that statutes imposing limitations upon action
by the United States are to be construed in favor of the
government.
It is immediately obvious that the court missed the
point. We are not here concerned with the construction
of a statute but with the construction and interpretation
of a written instrument purportedly authorized by the
statute. The statute is to be construed in favor of the
government but the document is to be construed in favor
of the taxpayer.
—16—
B. The Tax Collection Waiver of July 5, 1933, Was
Void Ab Initio.
The appHcable statute of limitations, section 278(d) of
the Revenue Act of 1926, supra, provides for collection
within six years after assessment or "prior to the expira-
tion of any period for collection agreed upon in writing
by the Commissioner and the taxpayer." (Italics sup-
plied. )
"Period" is defined by Webster's New International
Dictionary, Unabridged Second Edition (1947) as "a por-
tion or division of time. Specif. : A portion of time as
limited and determined by some recurring phenomenon,
as by the completion of a revolution of a heavenly body; a
division of time, as a series of years, months, or days in
which something is completed, and ready to recommence
and go on in the same order." It is defined by Bouvier's
Law Dictionary as "a stated and recurring interval of
time" and by Funk & Wagnalls Practical Standard Dic-
tionary as "a definite portion of time marked and defined
by some recurring event or phenomenon."
It follows, therefore, that for a waiver to be valid under
the applicable law it must be definite in duration. The
Tax Collection Waiver of July 5, 1933, was not; hence it
was void ab initio because not authorized by the statute.
This precise question, under the law here applicable,
has apparently not been heretofore decided. It is respect-
fully submitted that this court should do so and should
determine the issue in appellant's favor for the reasons set
forth above.
The court below bases its adverse decision on this point
primarily on the absence of cases in support of appellant's
contention. It i§ submitted that the absence of precedent
—17—
should not deter this court in deciding the issue as it
clearly should be. The court does cite Cunninghain Sheep
& Land Co., 7 B. T. A. 652 (1927), but that case arose
under the 1921 Act which provides that the taxpayer and
the Commissioner may consent in writing to ''a later de-
termination" and says nothing about collection within a
"period" agreed upon. The applicable law was, therefore,
quite different from that involved here.
The lower court also appears to accept appellee's state-
ment on brief that at the time the Tax Collection Waiver
was executed there was no statute providing in what
manner or for what period the statute of limitations on
collection may be waived. This statement is in error. All
acts, since waiver provisions first appeared in 1921, have
stated that the waivers shall be in writing and, beginning
with the 1924 Act as amended the period provided for is
that agreed upon — but it must be for some "period" and
not for an indefinite time.
C. The Tax Collection Waiver of July 5, 1933, Was
Superseded and Terminated by the Limited
Waiver of May 21, 1936.
Assuming, but not conceding, that the Tax Collection
Waiver of July 5, 1933, was not void ab initio, it was
effectively superseded and terminated by the limited waiver
contained in the second offer in compromise filed on May
21, 1936. (In this connection it must be borne in mind
that while the second offer was ultimately rejected by the
Commissioner, the zvaiver contained therein was accepted
by him in writing.)
The two waivers covered the same subject matter, that
is, income taxes assessed for the year 1925. They were
inconsistent in their terms; the 1933 waiver purported to
—18—
waive the statute for all time, whereas the 1936 waiver
was effective only for the period during which the offer in
compromise was being considered plus one year. They
were between the same parties, to wit, the appellant, and
the Commissioner.
The Commissioner accepted the 1936 waiver with
knowledge of the existence of the 1933 waiver, as indi-
cated by the fact that a copy of the latter was attached
to the former in the Commissioner's files. [Tr. 38.] If
he had not intended that the 1936 limited waiver should
supersede the 1933 unlimited waiver, he would not have
accepted the later waiver. It is not to be presumed that
the act of signing was meaningless. Furthermore, the
1936 offer containing the limited waiver was filed by ap-
pellant at the request of the Government. The intention
of the parties is clear.
A case in point is Helvervig v. Ethel D. Co., 70 F. 2d
761 (1934), in which the court discusses the principle at
some length. As stated by the court in that case :
"* * * jf the Commissioner was satisfied that it
[the so-called unlimited waiver] conformed to the
requirements of the law and rules in relation to
waivers and that it was effective to extend indefinitely
the time of making the assessment, it was obvious
that the second waiver added nothing to what the
government already had. Notwithstanding this, the
evidence shows the second waiver was accepted and
agreed to by the Commissioner."
The court then went on to apply the invariable rule that
where two writings between parties covering the same
subject matter are inconsistent with one another, the later
one rescinds, supersedes and is substituted for the earlier
—19—
one and becomes the only agreement between the parties
on the subject.
To the same efifect is Farmers Union State Exchange,
30 B. T. A. 1051, at 1066 (1934), where the Board said:
"The two waivers must be construed together.
* * * To say that the first waiver remained in
effect after the execution of the second waiver, under
the circumstances set out, would be equivalent to
brushing aside the meaning of the later waiver. It
must have been intended that the second waiver
should be substituted for the unlimited waiver."
The above quoted language can and should be applied
to our case without change. The 1933 and 1936 waivers
covered the same subject matter between the same parties
and were inconsistent in their terms. Therefore, the later,
limited waiver must be held to have rescinded, superseded,
and been substituted for the earlier, unlimited waiver.
Any other conclusion would render meaningless the
joint act of the parties and such a result is not to be pre-
sumed. This is particularly true where, as here, the form
of agreement used is a printed from provided by the Gov-
ernment and is filed at the Government's request. As
heretofore pointed out, the effect thereof shall be con-
strued most strongly against the party which provides the
document.
The lower court again misses the point when it dis-
misses the case of Atlantic Mills of Rhode Island v. U. S.,
3 Fed. Supp. 699 (1933), cited on brief below, with the
comment that the issue therein is not present in this case.
[Tr. 47.] That case was and is cited on the simple propo-
sition that a waiver is not effective until signed by the
—20—
Commissioner. True, all waivers involved herein were so
signed, and that is just the point.
If the limited waiver of May 21, 1936, had not been
signed by the Commissioner, it would have been of no
effect and the unlimited Tax Collection Waiver of July 5,
1933, would have continued in effect (assuming for the
sake of this argument that it did not fall or expire for one
of the other reasons advanced by this brief) ; but the Com-
missioner did sign, and in so doing performed an act
which is required in order to give effect to the instrument.
The only possible effect of the limited waiver was to re-
voke, terminate and supersede the unlimited waiver. Con-
sequently, the obvious^in fact, the only — conclusion to be
drawn from these facts is that the Commissioner, having
performed an affirmative act, must have intended it to be
effective.
Proceeding from the foregoing, it is a matter of simple
calculation to determine that the statute of limitations on
the collection of the taxes involved herein expired not later
than August 9, 1939, more than six years prior to the
date of collection.
The court below quotes at length from U. S. v. Fischer,
93 F. 2d 488 (1937) and Atlantic Mills of Rhode Island
V. United States, supra, and concludes therefrom that the
unlimited waiver was not terminated "by the giving" of
the Hmited waiver. (Italics supplied.)
The appellant does not contend that the giving of the
limited waiver terminated the unlimited waiver, but the
appellant does contend that the joint act of appellant and
the Commissioner in executing and making effective the
limited waiver did revoke, terminate, and supersede the
unlimited waiver.
—21—
In the Atlantic Mills case, supra, it was held that the
giving of a waiver, which was not signed by the Com-
missioner, did not constitute a notice by the taxpayer of
termination of a prior unlimited waiver. In our case, the
limited waiver was given to and signed by the Commis-
sioner, thus presenting an entirely different situation. A
definite period was set by agreement in our case whereas
the Commissioner refused to do so in the Atlantic Mills
case.
The Fischer case, supra, involved two limited waivers
rather than an unlimited one followed by a limited one, as
in our case, which is a distinguishing feature. But more
important is the diiference in the circumstances under
which the waivers were given in the two cases. In the
Fischer case the first waiver was given in connection with
an offer in compromise and held the statute open while the
government considered the offer. The second waiver was
executed subsequently, not in connection with an offer,
and, so far as the case reveals, totally unrelated to the
offer already on file. The government was still consider-
ing the offer when the time set by the second waiver ex-
pired. The Circuit Court ruled that, under the circum-
stances, the second did not supersede the first.
In our case, when the unlimited waiver was given on
July 5, 1933, no offer or other proceeding was pending
and the government had two years, five months and seven-
teen days left in which to collect the tax without further
waivers. Furthermore, on June 11, 1934, three months
after the Commissioner signed the waiver, the govern-
ment wrote the appellant's account off its books, indicating
it was no longer interested in trying to collect. The bal-
ance was abated nearly a year and a half before the un-
—22—
extended six-year statutory period of limitations would
have expired. There was, then, no need for a waiver
at that time. On the other hand, the subsequent limited
waiver was filed in connection with an offer in com-
promise and served a definite purpose in protecting the
government while it considered the offer. The situation
was just the reverse of that in the Fischer case, and it is
submitted that the decision should be the reverse, also.
Of course, the appellee will argue that waivers are uni-
lateral undertakings, are not contract, and require no con-
sideration; hence the foregoing differences in circum-
stances are immaterial. That the circumstances are ma-
terial is indicated by the Fischer case where the court
points out, at page 489, that "The defendant obtained con-
sideration of his compromise offer by agreeing that the
statute of limitations should be extended as therein pro-
vided."
The court below would let the government have its cake
and eat it too, judging from the following quotation from
the opinion [Tr. 56] :
". . . It is logical to assume that when the
Commissioner requested the third waiver, he intended
to secure a fixed period within which he might con-
sider the compromise offer and investigate the finan-
cial status of the taxpayer, during which period, in
the event the taxpayer filed notice of termination of
the unlimited waiver, the Commissioner would not be
left without a waiver."
We agree that the Commissioner intended to secure a
fixed period, but do not agree that he did not thereby re-
linquish the unlimited waiver. One waiver is sufficient to
—23—
protect the government. Why should it be permitted to
insist on two?
By its terms, the last waiver gave the government a
full year in which to act after the offer was rejected. In
this connection it should be borne in mind that collection
does not have to be accomplished within the time limit.
The statute is satisfied if proceedings are begun, by dis-
traint or suit in court, within that time. Thus the govern-
ment could have protected itself fully at any time prior
to the expiration of the statute as extended by filing suit
and obtaining a judgment against the appellant.
D. The Tax Collection Waiver of July 5, 1933, Was
Effective Only for a Reasonable Time.
Following the principle of contract cases that where
time for performance is not specified a reasonable time will
be allowed, the Board of Tax Appeals many years ago
adopted the rule that waivers which are not limited as to
time give the government a reasonable time within which
to act.
Herman Frost v. Commissioner, 23 B. T. A. 411
(1931);
Nathan Loeser v. Commissioner, 27 B. T. A. 601
(1933).
Those cases, and earlier cases cited therein, held periods
of time varying from one and a half years to five and a
half years to be reasonable. In all of the cases refund
claims, protests, or litigation were pending and these pend-
ing matters had to be settled before proper tax liability
could be determined. It was therefore held in each case
that, in view of these circumstances, the time wliich had
elapsed was not more than a reasonable time.
—24—
In our case the elapsed time from the date of filing of
the second or so-called unlimited waiver, to the date of col-
lection of the tax amounts to twelve years, four months
and nine days, during the last seven years, three months
and five days of which time there were no proceedings of
any sort had or pendnig between the plaintiff and the
government.
If we consider only the period from the expiration of
the statute as extended by the first waiver, or December
22, 1935, to the date of payment of the tax, we find that
the elapsed time was almost ten years. This is obviously
more than a reasonable length of time when it is noted that
no proceedings were pending during more than seven
years of this period.
The defendant will, of course, cite Greylock Mills v.
Commissioner, 31 F. 2d 655 (C. C. A. 2, 1929), as au-
thority for the rule that the so-called unlimited waivers
continue in effect until reasonable notice of termination
has been given by either party.
This statement by the court was pure dictum, the de-
cision of the Board of Tax Appeals having already been
upheld upon the basis of its finding of fact that the period
of time was reasonable. The rule propounded cannot,
therefore, be considered as binding.
No case has ever been decided solely on the basis of
this ride. Other circuit courts have expressly refused to
accept or reject it, Greylock Mills v. White, 63 F. 2d 866
(C. C. A. 1, 1933). In Helvering v. Ethel D. Co., supra.
—25—
the Circuit Court of Appeals for the District of Colum-
bia, after quoting from the Second Circuit's opinion to the
effect that notice was required, stated that it was "dis-
posed to think that the waiver would fall of itself after a
reasonable time" without the necessity of notice by either
party.
We think the proper rule and the one which the Second
Circuit would have adopted if the question had been neces-
sary to the decision of its case and had been carefully con-
sidered, is as stated in Farmers Union State Exchange v.
Commissioner, supra, that "an unlimited waiver does not
suspend the running of the statute forever, but only for a
reasonable time or until termination by either party upon
reasonable notice." In other words, such a waiver is good
for a reasonable time unless terminated sooner upon notice
by either party.
In our case it is submitted that the length of time dur-
ing which the second waiver must have been effective in
order for the defendant to prevail was so extremely long
that the waiver must have long since fallen of its own
weight and that no notice by the taxpayer was necessary.
A decision that the 1933 waiver fell of its own weight
after a reasonable time will recognize the expressed intent
of Congress "to protect the taxpayer."
The court below found as a fact that no unreasonable
time elapsed. [Tr. 72.] There is no evidence in the
record to support such a finding. In fact, the evidence is
all to the contrary, as pointed out above.
—26—
Conclusion.
In conclusion, appellant respectfuly submits that the
decision and judgment herein should be reversed for the
reason that the collection of the taxes herein involved was,
on November 14, 1945, the date of payment by the ap-
pellant, barred by the provisions of the applicable statute
of limitations.
Respectfully submitted,
Latham & Watkins,
By Dana Latham,
Henry C. Diehl,
Attorneys for Appellant.
No. 11973
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. Simmons,
Appellant,
vs.
Harry C. Westover, Collector of Internal Revenue,
Appellee.
Appeal From the District Court of the United States
for the Southern District of California,
BRIEF FOR THE APPELLEE.
Theron Lamar Caudle,
Assistant Attorney General.
Ellis N. Slack,
Robert N. Anderson,
John W. Fisher,
Special Assistants to the
Attorney General.
James M. Carter,
United States Attorney. j^'-^H
E. H. Mitchell,
Assistant United States Attorney. jvini* ^ sq^^
George M. Bryant,
Assistant United States Attorney. .^^
Eugene Harpole, .-^o
Special Attorney, Bureau of Internal Revenue.
Parker & Company, Law Printers, Los Angeles. Phone TR. 5206.
TOPICAL INDEX
PAGE
Opinion below 1
Jurisdiction 1
Question presented , 2
Statutes involved , 2
Statement 4
Summary of argument 8
Argument: The taxes in question were collected within the
period of limitation as extended by an unlimited waiver which
remained in full force and effect at the time of the payment.... 9
A. The collection of the tax in question was authorized by
Section 278(d) of the Revenue Act of 1926, as amended 9
B. The unlimited waiver was not superseded or terminated
by the limited waiver which accompanied the 1936 offer
in compromise : 11
C. The unlimited waiver could not be revoked or terminated
by mere lapse of time, but only upon reasonable notice
given by the taxpayer, and no such notice was given 15
D. Even if the unlimited waiver was effective only for a
reasonable time, the collection of the tax in question,
under the circumstances herein, was made within a rea-
sonable time ^ 16
Conclusion 19
TABLE OF AUTHORITIES CITED
Cases. page
Bateman v. Commissioner, 34 B. T. A. 351 15
Big Four Oil & Gas Co. v. Heiner, 57 F. 2d 29 10, 15
Cleage v. Daidley, 149 Fed. 346 17
Cunningham Sheep & Land Co. v. Commissioner, 7 B. T. A.
652 10
Davies v. Lahann, 145 F. 2d 656 15
Dunbar v. Commissioner, 119 F. 2d 367 17
Farmers Union State Exchange v. Commissioner, 30 B. T. A.
1051 12
Fidehty & Deposit Co. of Maryland v. McQuade, 123 F. 2d 337 15
Greylock Mills v. Commissioner, 31 F. 2d 655 15
Helvering v. Ethel D. Co., 70 F. 2d 761 11, 12
Mount Vernon Hotel Co. v. Block, 157 F. 2d 637 17
Niles Bement Pond Co. v. United States, 281 U. S. 357 18
Olds & Whipple v. United States, 22 F. Supp. 809 13
Pierce S. S. Co. v. United States, 17 F. Supp. 667 15
Ryan v. Alexander, 118 F. 2d 744 18
Stange v. United States, 282 U. S. 270 10
Stone V. White, 301 U. S. 532 18
Tooley v. Commissioner, 121 F. 2d 353 18
United States v. Anderson, 269 U. S: 422 18
United States v. Bank of Commerce & Trust Co., 32 F. Supp.
942 13
United States v. Fischer, 93 F. 2d 488 13
United States v. Jefferson Electric Co., 291 U. S. 386 18
United States v. Markowitz, 34 F. Supp. 827 13
United States v. Rindskopf, 105 U. S. 418 18
Warner Sugar Refining Co. v. Commissioner, 4 B. T. A. 5 15
Statutes.
Internal Revenue Code:
Sec. 1 (26 U. S. C, 1946 ed., Sec. 1) 3
Sec. 145 (26 U. S. C, 1946 ed., Sec. 145) 17
Sec. 3770 (26 U. S. C, 1946 ed., Sec. 3770) 2, 3
Revenue Act of 1926, Chap. 27, 44 Stat. 9, Sec. 278 2, 8, 9, 10
No. 11973
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. Simmons,
Appellant,
vs.
Harry C. Westover, Collector of Internal Revenue,
Appellee.
BRIEF FOR THE APPELLEE.
Opinion Below.
The opinion of the District Court [R. 41-67] is reported
at 76 Fed. Supp. 442.
Jurisdiction.
This appeal involves federal income taxes for the year
1925. The taxes in dispute, in the amount of $1,255.18,
plus assessed interest of $1,904.09, a total of $3,159.27,
were paid on November 14, 1945. [R. 72.] A claim for
refund was filed on December 11, 1945. [R. 3-4, 10.]
No decision thereon was rendered within six months, and
on June 27, 1946, the taxpayer brought this action in
the District Court for recovery of the taxes. [R. 6, 72.]
Jurisdiction was conferred on the District Court by Sec-
tion 24, Twentieth, of the Judicial Code. The judgment
was entered in favor of the Collector on April 26, 1948.
[R. 74-75.] Within sixty days thereafter and on June
21, 1948, a notice of appeal was filed (R. 75], pursuant
to the provisions of 28 U. S. C, Section 1291.
Question Presented.
Whether the balance of an assessment of additional
income tax for the year 1925, in the amount of $1,255.18,
plus assessed interest of $1,904.09 (a total of $3,159.27),
paid on November 14, 1945, was paid after the expiration
of the period of limitation applicable thereto, and hence
was an overpayment within the meaning of Section 3770
(a) (2) of the Internal Revenue Code, as contended by the
taxpayer; or was paid within the period of limitation as
extended by an unlimited collection waiver, which re-
mained in full force and effect at the time of the payment,
as determined by the Commissioner.
Statutes Involved.
Revenue Act of 1926, c. 27, 44 Stat. 9:
Sec. 278 (as amended by Sec. 506(a), Revenue Act
of 1928, c. 852, 45 Stat. 791). * * *
(d) Where the assessment of any income, excess-
profits or war-profits taxes imposed by this title or
by prior Act of Congress has been made (whether
before, or after the enactment of this Act) within the
period of limitation properly applicable thereto, such
tax may be collected by distraint or by a proceeding
in Court (begun before or after the enactment of this
Act), but only if begun (1) within six years after the
assessment of the tax, or (2) prior to the expiration
of any period for collection agreed upon in writing
by the Commissioner and the taxpayer before the
expiration of such six-year period. The period so
agreed upon may be extended by subsequent agree-
ments in writing made before the expiration of the
period previously agreed upon.
— 3—
Internal Revenue Code:
Chapter 1 — Income Tax
Sec. 1. Application of Chapter.
The provisions of this chapter shall apply only to
taxable years beginning after December 31, 1938.
Income, war-profits, and excess-profits taxes for tax-
able years beginning prior to January 1, 1939, shall
not be affected by the provisions of this chapter, but
shall remain subject to the applicable provisions of
the Revenue Act of 1938 and prior revenue acts, ex-
cept as such provisions are modified by legislation
enacted subsequent to the Revenue Act of 1938. (26
U. S. C. 1946 ed., Sec. 1.)
Sec. 3770. Authority to Make Abatements^
Credits, and Refunds.
(a) To Taxpayers. —
(1) Assessments and collections generally. —
* * 5|S
(2) Assessments and collections after limita-
tion period. — Any tax (or any interest, penalty,
additional amount, or addition to such tax)
assessed or paid after the expiration of the
period of limitation properly applicable thereto
shall be considered an overpayment and shall be
credited or refunded to the taxpayer if claim
therefor is filed within the period of limitation
for filing such claim. (26 U. S. C. 1946 ed.
Sec. 3770.)
^1—
Statement.
The essential facts, taken from the findings of the court
below, are as follows:
On or about October 19, 1929, income taxes for the
year 1925 were assessed against the taxpayer. Over-
assessments for other years were credited against the
amount assessed, leaving a balance of $3,723.06. After
notice and demand, a warrant of distraint was issued with
respect to the liability, and on December 19, 1929, notice
of lien was filed with the Recorder of Los Angeles County,
CaHfornia. [R. 69.]
The taxpayer made payments from time to time in
amounts varying from $75 to $250 on the outstanding
balance, until August 15, 1933, at which time the balance
due was the sum of $1,255.18, with interest thereon.
[R. 69.] On August 1, 1932, the taxpayer executed an
"Offer in Compromise" on Treasury Department Form
656, a printed form including a waiver with respect to the
statute of limitations, which waiver provided that the
taxpayer waived the benefit of any statute of limitations
affecting the collection of the liability sought to be com-
promised and in the event of the rejection of the offer,
expressly consented to the extension of any statute of
limitations affecting such liability, by the period of time,
not exceeding two years elapsed between the date of the
filing of the offer and the date on which final action
thereon should be taken. The offer and waiver were
executed at the request of the Collector of Internal Rev-
enue at Los Angeles, and were filed with such collector
1
—5—
on August 15, 1932. [R. 69.] The taxpayer attached
to the foregoing offer his letter dated July 20, 1932, ad-
dressed to the Commissioner of Internal Revenue, wherein
the taxpayer enclosed a financial statement which showed
liabilities in the amount of $32,482.73, which was in
excess of his assets. [R. 70.] Such excess amounted to
$32,283.35^^. [R. 25.] The taxpayer stated in the
letter that if his financial status became known to his
employer he would lose his position. [R. 70.] On Au-
gust 25, 1932, the Commissioner of Internal Revenue
accepted in writing the taxpayer's ''Waiver of Statute of
Limitations," and on October 18, 1932, rejected the "Offer
in Compromise." [R. 70.]
On July 5, 1933, at the request of the Collector of In-
ternal Revenue, the taxpayer executed a "Tax Collection
Waiver," wherein it was agreed between the Commissioner
of Internal Revenue and the taxpayer that the amount of
$3,472.06, representing as assessment of income taxes
for the year 1925, might be collected, with interest, from
the taxpayer by distraint or by a proceeding in court
begun at any time. At that time, no offer in compromise
was pending and the waiver was not submitted in con-
nection with any offer in compromise. The waiver was
accepted by the Commissioner on March 5, 1934. [R. 70.]
On May 6, 1936, the taxpayer executed an "Offer in
Compromise" on Treasury Department Form 656, a
printed form including a waiver with respect to the
statute of limitations, which waiver provided that the
taxpayer waived the benefit of any statute of limitations
affecting the collection of the liability sought to be com-
promised, and agreed to the suspension of the statutory
period of limitations on assessment or collection for any
period during which the offer should be pending and for
one year thereafter. The taxpayer tendered with the
offer the sum of one hundred dollars in settlement of the
balance due, and stated in the offer that he had been
without income for several years and had subsisted largely
on borrowed money. He included with the offer a finan-
cial statement which showed his liabilities in excess of his
assets by the amount of $28,698.35. The offer and waiver
were executed at the request of the Collector of Internal
Revenue at Los Angeles and were filed with such Collector
on May 21, 1936. The Collector transmitted the offer
and waiver to the Commissioner of Internal Revenue,
forwarding therewith a copy of the Tax Collection Waiver
filed July 5, 1933. The waiver executed May 6, 1936
was accepted by the Commissioner of Internal Revenue in
writing on May 29, 1936, and the offer submitted at the
time of such waiver was rejected by the Commissioner
on August 9, 1938. [R. 70-71.]
After August 9, 1938, no offer in compromise from the
taxpayer was pending or under consideration by the
Bureau of Internal Revenue, and from such date of
August 9, 1938, until October 9, 1945, the taxpayer had
no correspondence or conferences with the Government
concerning the taxes involved, and, to the taxpayer's
knowledge, no attempts were made during that period
to collect such taxes. [R. 71-72.] On October 9, 1945,
—7—
the Collector of Internal Revenue made demand on the
taxpayer for the payment of the taxes, and on November
14, 1945, the taxpayer paid the balance of $1,255.18,
plus interest of $1,904.09, and fifty cents for release of
the lien hereinabove mentioned. Thereafter, the taxpayer
filed a claim for refund of the amount of the taxes and
interest so paid. After the lapse of six months from the
filing of the claim without action by the Commissioner,
the taxpayer brought the instant action. [R. 72.]
No notice with respect to revoking the Tax Collection
waiver of July 5, 1933, was given by the taxpayer.
[R. 72.1
Under all the circumstances, no unreasonable time
elapsed prior to the date when the Government collected
from the taxpayer the taxes herein involved. [R. 72.]
The District Court concluded that the Tax Collection
Waiver of July 5, 1933, was valid; that it was not
revoked or terminated by the execution and acceptance
of the waiver of May 6, 1936; that it was not revoked
or terminated by the lapse of time; that it was operative
at the time the taxes in question were collected; that the
payment of the taxes and interest herein did not constitute
an overpayment, and that the defendant Collector was
entitled to judgment with costs. [R. 73.]
Summary of Argument.
The taxes in question were collected within the period
of limitation as extended by an unlimited waiver which
remained in full force and effect at the time of payment.
The collection of the tax was authorized by Section
278 (d) of the Revenue Act of 1926, as amended. The
collection was made while an unlimited waiver given by
the taxpayer was in full force and effect.
The unlimited waiver was not terminated by an offer in
compromise made in 1936, with an accompanying waiver.
The unlimited waiver could not be revoked or termi-
nated by mere lapse of time, but only upon reasonable
notice given by the taxpayer, and no such notice was given.
Even if the unlimited waiver was effective only for a
reasonable time, the collection of the tax in question,
under the circumstances herein, was made within a rea-
sonable time.
There is a presumption that taxes paid are rightly
collected upon assessments correctly made by the Com-
missioner, and in a suit to recover them the burden rests
upon the taxpayer to prove all the facts necessary to
establish the illegality of the collection. The taxpayer
has not sustained that burden in the instant action.
A suit for refund of taxes is governed by equitable
principles and the taxpayer must recover by virtue of a
right measured by equitable standards.
If the taxpayer was unable to pay the taxes prior to
1945 he has no real ground for complaint as to the delay.
If he was able to pay, the delay in payment was as much
due to the taxpayer's wrong as to the failure of the tax
officials. He should not be permitted to take advantage
of his own wrong.
ARGUMENT.
The Taxes in Question Were Collected Within the
Period of Limitation as Extended by an Unlimited
Waiver Which Remained in Full Force and Effect
at the Time of the Payment.
No issue is raised in the taxpayer's complaint [R. 2-4]
as to the due and timely assessment of the taxes, and
no such issue has been suggested at any time during the
presentation of the case. Both parties have assumed that
the assessment was timely made, and both have relied
upon the statutory provisions pertaining to the collection
of taxes after assessment has been made ''within the
period of limitation properly applicable thereto." Sec.
278(d) of the Revenue Act of 1926, as amended, supra.
Hence, the discussion herein assumes the timely assess-
ment of the tax.
We agree with the position of the taxpayer (Br. 9)
that the tax in question was paid after the period of limita-
tion had expired, unless the Tax Collection Waiver of
July 5, 1933, which will be hereinafter referred to as
the unlimited waiver, was effective to keep the limitation
period open.
A. The Collection of the Tax in Question Was Authorized
by Section 278(d) of the Revenue Act of 1926, as
Amended.
The period provided for collection in Section 278 (d)
of the Revenue Act of 1926, as amended, supra, is six
years, after assessment, but this period may be extended
by agreement. The tax was assessed on or about October
19, 1929, pursuant to an agreement between the taxpayer
and the Commissioner. [R. 11-69.] Without extension,
—la-
the collection period would therefore have expired on or
about October, 1935. While there was some extension
of this time by the waiver contained in the 1932 offer in
compromise [R. 69, 70], and there was afterward, in
1936, another similar extension, it is the unlimited waiver
upon which the Government relies to support the collec-
tion. Under this waiver, the collection was made prior
to the expiration of the period agreed upon in writing
within the meaning of Section 278 (d), as amended, supra.
The taxpayer argues (Br. 16) that the unlimited waiver
was void ab initio because it was not definite in duration.
Such a contention was rejected by the Board of Tax
Appeals in Cunningham Sheep & Land Co. v. Commis-
sioner, 7 B. T. A. 652, 655. The taxpayer asserts (Br.
17) that the Cunningham case arose under the Revenue
Act of 1921, Section 250(d) of which provides that the
taxpayer and the Commissioner may consent to "a later
determination" but says nothing about collection within a
"period" agreed upon. However, it is to be noted that
in that case the Board considered the applicability of Sec-
tion 278 (c) of the Revenue Act of 1924, which provided
that where the Commissioner and the taxpayer had con-
sented in writing to the assessment of the tax after the
time prescribed in Section 277, the tax might be assessed
at any time "prior to the expiration of the period agreed
upon," and said that the consent there involved, which
was to a determination, assessment and collection of taxes
irrespective of any period of limitations, was sufficient to
meet the requirements of such Section 278 (c).
The validity of unlimited waivers was also sustained in
Stange v. United States, 282 U. S. 270, and Big Four
Oil & Gas Co. V. Heiner, S7 F. 2d 29 (C. C. A. 3rd).
—11—
B. The Unlimited Waiver Was Not Superseded or Termi-
nated by the Limited Waiver Which Accompanied the
1936 Offer in Compromise.
In support of his position that the unHmited waiver
v^as superseded or terminated by the 1936 waiver, the
taxpayer cites (Br. 18) Helvering v. Ethel D. Co., 70
F. 2d 761 (App. D. C.)- The decision of the court that
the unhmited waiver in that case was superseded by the
later definite waiver was based on the finding that such
was the intention of both the Government and the tax-
payer. The circumstances pointing to such intention
there are not present in the instant case. The waiver
there was requested by the Government apart from and
not as incidental to an offer in compromise as was the
1936 waiver in the instant case. The unlimited waiver
there was on a form then being abandoned and a new form
was being used. The 1936 waiver in the instant case
was on a printed form of offer in compromise, and the
waiver was incidental to the offer. The new waiver in
the Ethel case fixed a definite date (December 31, 1925)
for the termination of the limitation period, while in the
instant case, the 1936 waiver merely suspended the run-
ning of the statute for a certain period. The new waiver
in the Ethel -case was requested by the Government and
was submitted immediately after the unlimited waiver,
and it was definitely understood by both parties that it was
asked for and submitted because the unlimited waiver was
unsatisfactory. The circumstances are so different that
the Ethel case can furnish no support for a similar de-
cision in the instant case. In the Ethel case, the court
said that the new waiver was a sufificient notice to effect
a termination of the unlimited waiver as of that date.
—12—
In the instant case, the District Court found as a fact
that no notice with respect to the termination of the un-
limited waiver had been given by the taxpayer. [R. 72.]
This impHes a finding that the 1936 waiver was not
intended as such a termination, and it was clearly not an
erroneous finding.
The Taxpayer argues (Br. 22-23) that the 1936 waiver
could serve no purpose if the unlimited waiver was op-
erative, but clearly it could serve the purpose of giving
the Commissioner a time certain within which to con-
sider the offer submitted, even if the taxpayer at any time
gave notice of the termination of the unlimited waiver
and regardless of what might be held later as to a rea-
sonable time for the running of the unlimited waiver.
The taxpayer also cites (Br. 19) Farmers Union State
Exchange v. Commissioner, 30 B. T. A. 1051. The Board
there treated the question whether the unlimited waiver
was terminated by a later limited waiver as depending on
intent, and said (p. 1068) that it must have been intended
that the limited waiver should be substituted for the un-
limited waiver. The Board noted that the second waiver
was executed before the unlimited waiver became effective.
In the instant case, the unlimited waiver had been effective
from 1933 to 1936, when the limited waiver was executed.
In the Farmers case like the Ethel case, supra, the later
waiver involved fixed the time of the extension provided
for by referring in terms to the expiration of the limi-
tation period. In the Farmers case, the later waiver was
to be effective for a period of one year after the expiration
of the statutory period as previously extended. In the
instant case, the limited waiver of 1936 does not in terms
provide any date whatever with respect to the expiration
of the limitation period. It merely provides for the
—13—
suspension of the running of the statutory period for the
period during- which the offer should be pending and for
one year thereafter. [R. 71.]
A provision relative to the suspension of the statute is
not equivalent to a provision providing for the expiration
of the statute or fixing a date with respect to such ex-
piration. The suspension provision in the limited waiver
in the instant case hinged upon the pendency of the offer,
and was wholly apart from and independent of any
expiration date. United States v. Markowitz, 34 F. Supp.
827 (N. D. Cal); Olds & Whipple v. United States, 22
F. Supp. 809 (C. Cls.); United States v. Bank of Com-
merce & Trust Co., 32 F. Supp. 942 (W. D. Tenn.)
Under the reasoning of the cases just cited, the end of a
suspension period does not mean that the statute then
expires, but rather, when the suspension period ends, it
is necessary to refer to the status quo before the sus-
pension period began and then add after the end of the
suspension period whatever time and allow whatever rights
the Government had prior to the beginning of the period.
Prior to the suspension period under the limited waiver
here involved (commencing on May 21, 1936, when the
1936 waiver was filed) the Government had unlimited
waiver rights under the 1933 unlimited waiver. Those
rights automatically continued when the suspension period
here ended in 1939, and the statute resumed its running.
Another case in point is United States v. Fischer, 93
F. 2d 488, 489 (C. C. A. 2d). This was an action by
the United States to collect taxes due from the taxpayer.
The action was barred unless a waiver given by the tax-
payer in January, 1932, in connection with an offer in
compromise was controlling. That waiver extended the
Statute by the period of time (not exceeding two years)
—14—
which had elapsed between the date of filing of the offer
and the date of final action thereon. The offer was pend-
ing approximately two years. The action was within that
extension period. The lower court, however, had held
that first waiver not controlling on the ground that it
had been superseded by two later waivers given in Feb-
ruary, 1932, which extended the time for collection either
by distraint or by a proceeding in court begun at any time
before December 31, 1933. The second Circuit Court
of Appeals reversed the judgment, holding that the ex-
tension effected by the first waiver was not reduced by
the later waivers, since the Government relinquished no
rights by accepting them. It is to be noted, in view of
the taxpayer's comment (Br. 20-21), that the later
waivers were not merely given but were accepted also.
By the 1936 waiver, in the instant case, the taxpayer
and the Government recognized the efficacy of the unlim-
ited waiver. In the absence of any waiver, the six year
statute would have expired six years after October 19,
1929, or on October 19, 1935. The 1932 waiver had
extended the statute for two months and three days, which
period would carry from October 19, 1935, to December
22, 1935. This latter date would have been the expira-
tion date if there had been no waiver subsequent to the
1932 waiver. Hence, the statute would have expired in
1935 but for the 1933 unlimited waiver. When he
entered into the 1936 waiver, the taxpayer recognized
the statute as "running" and not as having run or expired.
The 1936 waiver provided that such "running" was to
be suspended for a definite period of time. If the statute
was not running when the 1936 waiver was filed, then
the taxpayer who executed the waiver and the Commis-
sioner who accepted it were acting under a mutual mis-
—15—
take, and according-ly, the 1936 waiver can be avoided
on that ground, whether the mistake be deemed one of
fact (Davies v. Lahann, 145 F. 2d 656, 660 (C. C. A.
10th) ; Fidelity & Deposit Co. of Maryland v. McQuade,
123 F. 2d Z2>7, 339 (App. D. C)), or one of law {S. S.
Pierce Co. v. United States, 17 F. Supp. 667, 669 (Mass.),
and cases there cited).
Regardless of whether the statute was or was not
"running" when the 1936 waiver was filed, it follows
from the foregoing that in either event the taxpayer's
reliance upon such waiver to supersede the unHmited
waiver is in vain for the reason that that waiver either
operated as a mere suspension of the statute, which after
the suspension resumed running, or else it accomplished
nothing whatsoever.
C. The Unlimited Waiver Could Not Be Revoked or Ter-
minated by Mere Lapse of Time, but Only Upon
Reasonable Notice Given by the Taxpayer, and No Such
Notice Was Given.
A waiver which is in terms unlimited as to time expires
only upon reasonable notice to that effect given by the
taxpayer. Greylock Mills v. Commissioner, 31 F. 2d 655,
658 (C. C. A. 2d); Big Four Oil & Gas Co. v. Heiner,
57 F. 2d 29, 30-31 (C. C. A. 3d) ; Warner Sugar Refining
Co. V. Commissioner, 4 B. T. A. 5, 11-12; Bateman v.
Commissioner, 34 B. T. A. 351, 358. No notice was given
by the taxpayer with respect to the termination of the
unhmited waiver here involved. [R. 72.] That the 1936
limited waiver did not constitute such notice was shown
under point B above. The unlimited waiver therefore
remained in effect when the tax in question was paid.
—16—
D. Even if the Unlimited Waiver Was Effective Only for
a Reasonable Time, the Collection o£ the Tax in Ques-
tion, Under the Circumstances Herein, Was Made Within
a Reasonable Time.
Even if the unlimited waiver was effective only for a
reasonable time, it is clear that the collection of the tax
here involved was made within such time. In determining
what is a reasonable time for collection, it seems obvious,
that account must be taken of the taxpayer's financial
condition, among other circumstances. In his letter of
July 20, 1932 [Ex. A-3, R. 24-25], which was submitted
with his first offer in compromise, he stated that he was
unable to pay in a lump sum the balance then due, and
that after making some installment payments, the last of
which was made on July 8, 1932, his financial condition
had grown worse, that his salary had been cut, that he
owed a number of other debts, that he had to keep up a
certain front in order to maintain his position, and that
if it were known he was bankrupt, his ''term would be
short indeed." He submitted a statement of assets and
liabilities, showing liabilities exceeding assets by the
amount of $32,283.35>4. [Ex. A-4, R. 26-27.)
The taxpayer submitted a new offer in compromise
which was dated May 6, 1936, and filed May 29, 1936.
[Ex. D-1, R. 30-33.] This was an offer of $100, in
addition to $2,216.88 referred to as already paid. He
stated that he had been for several years without regular
income and had been subsisting on borrowed money. His
—17—
financial statement at that time [Ex. D-4, R. 37] showed
liabiHties in excess of assets by the amount of $28,698.35.
The record thus shows that by his own representation,
he was in an insolvent condition in 1932 and that it con-
tinued for at least four years. Such a condition once
shown to exist is presumed to continue in the absence of
evidence to rebut the presumption. The presumption
applies to a person's financial condition and specifically
to insolvency. Mount Vernon Hotel Co. v. Block, 157 F.
2d 637, 639 (C. C. A. 9th); Dunbar v. Commissioner,
119 F. 2d 367, 370 (C. C. A. 7th); Cleage v, Laidley,
149 Fed. 346, 354 (C. C. A. 8th). The duration of the
presumption depends of course on the circumstances. It
had continued by the taxpayer's own representations for
four years. In this case, a duty rested on the taxpayer
to make payment as soon as he was able. Section 145 (a)
of the Internal Revenue Code (26 U. S. C. 1946 ed.,
Sec. 145(a)), provides a heavy penalty for wilful failure
to pay a tax. The taxes were admittedly justly due and
owing, and so far as lapse of time is concerned, it was
a penal offense for the taxpayer not to pay the taxes if
he was able to do so. The taxpayer has no real ground
for complaint as to delay in the absence of a showing
that efforts to collect would not have been futile. He has
made no such showing.
Taking all the circumstances into account, there was no
unreasonable delay in the collection of the taxes in (jues-
tion. The District Court so found. [R. 72.]
—18—
The presumption is that taxes paid are rightly collected
upon assessments correctly made by the Commissioner,
and in a suit to recover them the burden rests upon the
taxpayer to prove all the facts necessary to establish the
illegality of the collection. Niles Bement Pond Co. v.
United States, 281 U. S. 357, 361 ; United States v. An-
derson, 269 U. S. 422; see United States v. Rindskopf,
105 U. S. 418. This rule as to the burden resting on the
taxpayer applies where the taxpayer is asserting the
expiration of the statutory period. Tooley v. Commis-
sioner, 121 F. 2d 353 (C. C. A. 9th). A suit for refund
of taxes is governed by equitable principles and the tax-
payer must recover by virtue of a right measured by
equitable standards. United States v. Jefferson Electric
Co., 291 U. S. 386, 402; Stone v. White, 301 U. S. 532,
534-535; Ryan v. Alexander, 118 F. 2d 744 (C. C. A.
10th).
If collection of these taxes was possible prior to
October 9, 1945, the date of the Collector's final demand,
the delay in payment beyond that time was at least as
much due to the taxpayer's wrong as to the failure of the
tax officials. It is a fundamental principle that no one
can take advantage of his own wrong. This principle
should particularly apply in a proceeding of an equitable
nature such as the instant action.
— 19t—
Conclusion.
The judgment of the District Court should be affirmed.
Respectfully submitted,
T HERON Lamar Caudle,
Assistant Attorney General.
Ellis N. Slack,
Robert N. Anderson,
John W. Fisher,
Special Assistants to the
Attorney General.
James M. Carter,
United States Attorney.
E. H. Mitchell,
Assistant United States Attorney.
George M. Bryant,
Assistant United States Attorney.
Eugene Harpole,
Special Attorney, Bureau of Internal Revenue.
November, 1948.
No. 11973
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. Simmons,
Appellant,
vs.
Henry C. Westover, Collector of Internal Revenue,
Appellee.
REPLY BRIEF FOR APPELLANT.
Latham & Watkins,
1112 Title Guarantee Building", Los Angeles 13,
Attorneys for Appellcmt.
FILtJu.
MOV ^',0 \m
Parker & Company, Law Printers, Los AngelM. Phone TR. 5206.
TOPICAL INDEX
PAGE
Appellee confuses the legal principles applicable to this pro-
ceeding 1
Conclusion 5
TABLE OF AUTHORITIES CITED
Cases. page
Big Four Oil and Gas Co. v. Heiner, 57 F. 2d 29 ....1, 2
Helvering v. Ethel D. Co., 70 F. 2d 761 2
Stange v. United States, 282 U. S. 270 1
United States v. Fischer, 93 F. 2d 488 4
Wirt Franklin v. Commissioner, 7 B. T. A. 636 3
Statutes
Internal Revenue Code, Sec. 277 3
Revenue Act of 1926, Sec. 278(d) 3
No. 11973
IN THE
United States Court of Appeals
FOR THE NINTH CIRCUIT
E. C. Simmons,
Appellant,
vs.
Henry C. Westover, Collector of Internal Revenue,
Appellee.
REPLY BRIEF FOR APPELLANT.
Appellee Confuses the Legal Principles Applicable to
This Proceeding.
The Appellee in his brief has cited numerous cases as
authority for his statements of legal principles applicable
to this proceeding. Because some of the statements are
misleading and are not supported by the cases cited, the
Appellant deems it necessary to comment on some of these
citations in this reply brief.
At the bottom of page 10 of his brief, the Appellee cites
Stange v. U. S., 282 U. S. 270, and Big Four Oil and
Gas Co. V. Reiner, 57 F. 2d 29, as upholding the validity
of unlimited waivers. In neither of these cases was a de-
cision on this issue necessary and both cases arose under
revenue acts which did not require that the extension of
the statutory period of limitations be for a "period." In
the Stange case, the issues decided were whether the exe-
— 2—
cution of a waiver after the expiration of the statute was
effective and whether a consent to the determination of the
liabiHty included a consent to its collection. In the Big
Four Oil and Gas case, the Court found that the Revenue
Act of 1926 intervened and provided retroactively for col-
lection of the tax within six years, and that the tax in-
volved had been collected within six years. Thus, neither
of these cases is direct authority for the statement made
by the Appellee.
At page 11 of his brief, in commenting upon the case
of Helvering v. Ethel D. Co., 70 F. 2d 761, the Appellee
makes certain statements which are not entirely accurate.
He states that it was "definitely understood by both par-
ties" in that case that the limited waiver was submitted
because the unlimited waiver was unsatisfactory. A read-
ing of the case discloses that the conclusion that the par-
ties so understood and intended that the second waiver
superseded the first was based upon inferences and not
upon a finding of a "definite understanding." As stated
in Appellant's opening brief, at page 18, the Court found
that the parties must have intended the second waiver to
supersede the first, because the second would have had no
effect otherwise.
The Appellee further states that in the Ethel D. case
the Court found that the new waiver was a notice of
termination of the old unlimited waiver. It is true that
the Board of Tax Appeals made this statement, but the
Circuit Court did not base its affirmance on this ground,
but rather on the ground that because the two instruments
involved the same subject matter, the later one necessarily
superseded the earlier one.
— 3—
At page 13 of his brief, Appellee attempts to distin-
guish between a waiver providing for the "suspension"
of the statute and one which provides a definite expiration
date. It would seem that a reading of the statute should
satisfactorily answer any argument the Appellee might
make on this point. The applicable statute, Section 278(d)
of the 1926 Revenue Act as Amended, provides for the
"extension" of the statute by written agreement. In other
places, Congress has used the word "suspension" as in
Section 277 of the Internal Revenue Code, which provides
that the statute shall be suspended pending an appeal to
the Tax Court. The use of the two different words must
have some significance. Hence, when a waiver, executed
under Section 278(d), speaks of "suspending" the statute,
its effect must necessarily be an "extension" of the statute
since that is what the statute itself provides. As stated
in Wirt Franklin v. Commissioner, 7 B. T. A. 636, at
639:
"The instrument under consideration is denominated
an 'income and profits-tax waiver.' It is in fact a
bilateral undertaking entered into by the parties pur-
suant to the statute. Technically, it is not a waiver
of the statute, for it is made pursuant to the statute.
It is not an acknowledgment of any existing obliga-
tion or a new promise to pay, from which a new
cause of action arises, thus beginning anew the period
of limitation. It is not an agreement not to plead
the statute of limitations as a defense to any asserted
tax liability. In short, it is not something to be con-
sidered as in avoidance of the statute. By the statute
and by its terms, it operates to extend the time."
— 4—
The case of United States v. Fischer, 93 F. 2d 488,
cited at page 13 of Appellee's brief, has already been
commented upon in Appellant's opening brief at pages 21
and 22 and no further comment is deemed necessary.
It is rather hard to understand the argtiment advanced
by Appellee at pages 14 and 15 of his brief to the eifect
that the 1936 waiver was void because of a mutual mistake
of fact or law. In the first place, the record shows that
both parties were fully aware that the unlimited waiver
was outstanding at the time the limited waiver was exe-
cuted, and that the status of the unlimited waiver was un-
certain. Hence, they must have intended the limited waiver
to supersede it and settle all doubts as to the expiration
of the statute. In the second place, any mistake there may
have been is based upon an assumption that the unlimited
waiver was invalid. If it was invalid, then the Appellant
is entitled to a reversal of the lower Court's judgment
without further ado.
If the unlimited waiver was not invalid, then it was, of
course, no "mistake" on the part of either party when the
subsequent limited waiver was filed.
The Appellee concludes his brief on page 18 with the
citation of three cases in support of the proposition that
suits for refund of taxes are governed by equitable prin-
ciples. It should be noted first that the cases cited in-
volve special situations and second, that equitable prin-
ciples can hardly be applicable to a situation where the
statute says in plain language that taxes paid after the ex-
piration of the period of limitations on collection consti-
tute an overpayment and shall be refunded.
— 5—
Conclusion.
For the reasons stated in Appellant's opening brief, it
is respectfully submitted that the judgment of the District
Court should be reversed.
Respectfully submitted,
Latham & Watkins,
By Dana Latham,
Henry C. Diehl,
Attorneys for Appellant.
No. 11974
CHottrt nf KppBuU
for tl|« Ninttf Olirrtitt
WALLACE RAYMOND SHAVER,
Appellant,
vs.
UNITED STATES OF AMERICA,
Appellee.
©rattarnpt at Stworb
Appeal from the District Court of the Unite(Mt|tes pc^
for the Northern District of California!^ IliwISBL^
Southern Division
NOV 1-1948
PAUL p. O-BRIENX^
^' ■ 11 ,1 tni W HK
Typo Press, 398 Pacific, San Francisco 10-21-48—60
No. 11974
United States
far ttfr Ninttr QTirmit
WALLACE RAYMOND SHAVER,
Appellant,
vs.
UNITED STATES OF AMERICA,
Appellee.
©rattBrrtpt of Sworii
Appeal from the District Court of the United States
for the Northern District of California,
Southern Division
INDEX
[Clerk's Note: When deemed likely to be of an important nature,
errors or doubtful matters appearing in the original certified record
are printed literally in italic; and, likewise, cancelled matter appear-
ing in the original certified record is printed and cancelled herein
accordingly. When possible, an omission from the text is indicated by
printing in italic the two words between which the omission seems
to occur.]
PAGE
Appeal :
Certificate of Clerk to Transcript of Record
on 12
Designation of Record on (DC) 10
Notice of 9
Order that Certain Exhibits May Be Consid-
ered in Original Form on (USCA) 43
Orders Extending Time to File Transcript of
Record on 11, 12
Statement of Points Upon Which Appellant
Intends to Rely on (DC) 11
Statement of Points Upon Which Appellant
Intends to Rely on and Designation of Rec-
ord on (USCA) 41
Stipulation re Exhibits on (USCA) 42
Arraignment — Minute Order May 13, 1948 4
Certificate of Clerk to Transcript of Record on
Appeal 12
Designation of Record on Appeal (DC) 10
Designation of Record on Appeal, Statement of
Points and (USCA) 41
Indictment 2
Judgment — Minute Order of July 2, 1948. ... 8
u.
PAGE
Minutes Orders:
May 13, 1948 — Arraignment 4
May 28, 1948— Plea of Not Guilty 5
June 11, 1948— Trial 7
July 2, 1948— Judgment 8
Names and Addresses of Attorneys 1
Notice of Appeal 9
Order that Certain Exhibits May be Considered
in Original Form (USCA) 43
Orders Extending Time to File Transcript of
Record 11, 12
Plea of Not Guilty— Minute Order of May 28,
1948 5
Statement of Points Upon Which Appellant
Intends to Rely Upon Appeal (DC) 11
Statement of Points I'^pon Which Appellant
Intends to Rely and Designation of Record
on Appeal (USCA) 41
Stipulation that Certain Exhibits May be Con-
sidered in Original Form (USCA) .42
Transcript of Testimony and Proceedings 13
Exhibits for United States:
1 — Railway Express Agency Receipt No. 4844.
received in evidence . . 22
2 — Railway Express Receipt No. 2025, re-
ceived in evidence 23
lU.
PAGE
Exhibits for United States— (Cont'd)
3 — Railway Express Receipt 10/3/194 . . , re-
ceived in evidence 23
4 — Railway Express Receipt, Mrs. Israel
Smith, admitted in evidence 24
6 — Statement of Wallace Raymond Shaver to
F.B.I., dated 4/14/48 33
Witnesses for Government:
Papich, Sam
— direct 31
— cross 36
Rundle, R. H.
—direct 20
— cross 27
— redirect 28
— recross 30
Waiver of Jury Trial 6
Nx\MES AND ADDRESSES OF ATTORNEYS
JAMES T. DAVIS,
1095 Market Street,
San Francisco, California,
Attorney for Defendant and Appellant.
FRANK J. HENNESSY,
United States Attorney,
Northern District of California,
Post Office Building,
San Francisco, California,
Attorney for Plaintiff and Appellee.
2 Wallace Raymond Shaver vs.
In the Southern Division of the United States
District Court for the Northern District
of California
No. 31417R
Viol, Title 18 United States
Code, Section 409
UNITED STATES OF AMERICA,
Plaintiff,
Defendant.
vs.
WALLACE RAYMOND SHAVER,
INDICTMENT
FIRST COUNT:
The Grand Jury charges: that
On or about the 30th day of October, 1947, at
ihc City and County of San Francisco, State and
Northern District of California, Wallace Raymond
Shaver (hereinafter called ''said defendant"),
being an employee of a carrier, to-wit. Railway Ex-
press Agency, riding upon a motor truck of sucli
carrier, transporting property in interstate com-
merce and having in his custody funds arising out
of and accruing from such transportation, did em-
bezzle and unlawfully convert to his own use, a
portion of such funds, to-wit, the smn of $73.29,
wliicli arose out of and accrued from an interstate
United States of America 3
shipment of propert}^ from the City of Omaha,
Nebraska, to and into the City and County of San
Francisco, State of California. [1*]
SECOND COUNT:
The Grand Jury further charges: that
On or about the 4th day of September, 1947, at
the City and County of San Francisco, State and
Northern District of California, the said defend-
ant, being an employee of a carrier, to-wit, Rail-
way Express Agency, riding upon a motor truck
of such carrier, transporting property in interstate
commerce and having in his custody funds arising
out of and accruing from such transportation, did
embezzle and unlawfully convert to his own use, a
portion of such funds, to-wit, the sum of $18.25,
which arose out of and accrued from an interstate
shipment of property from LaGrange, State of
Illinois, to and into the City and County of San
Francisco, State of California.
A True Bill.
ARTHUR C. GRIFFIN,
Foreman, Deputy.
/s/ FRANK J. HENNESSY,
United States Attorney.
(Approved as to Form: R. B. McM).
[Endorsed] : Presented in open court and or-
dered filed May 12, 1948. [2]
♦Page numbering appearing at foot of page of original certified
Transcript of Record,
4 Wallace Raymond Shaver vs.
District Court of the United States, Northern
District of California, Southern Division
At a stated term of the District Court of the
United States for the Northern District of Cali-
fornia, Southern Division, held at the Court Room
thereof, in the City and County of San Francisco,
on Thursday, the 13th day of May, in the year of
our Lord one thousand nine hundred and forty-
eight.
Present: The Honorable Michael J. Roche,
District Judge.
[Title of Cause.]
ARRAIGNMENT
In this case the defendant, Wallace Raymond
Shaver, was present in the custody of the United
States Marshal and with his attorney, James Davis,
Esq. Daniel C. Deasy, Esq., Assistant Unifpd
States Attorney, was present on behalf of the
United States.
On motion of Mr. Deasy, the defendant was
called for arraignment. The defendant was in-
formed as to the return of the Indictment by the
United States Grand Jury, and asked if he was
the person named therein, and upon his answer
that he was and that his true name was Wallace
Rajanond Shaver, thereupon Mr. Davis waived the
reading of the Indictment. Copy of Indictment
was handed to the defendant, who stated that he
understood the charge against him.
United States of America 5
On motion of Mr. Davis and with consent of Mr.
Deasy, it is ordered that the amount of bail for
release of defendant be reduced from $1000.00 to
$500.00.
Ordered that this case be continued to May 20,
1948, for entry of plea; and that in default of bail
defendant be remanded to the custody of the
United States Marshal. [3]
District Court of the United States, Northern
District of California, Southern Division
At a Stated Term of the District Court of the
United States for the Northern District of Cali-
fornia, Southern Division, held at the Court Room
thereof, in the City and County of San Francisco,
on Friday, the 28th day of May, in the year of our
Lord one thousand nine hundred and forty-eight.
Present: The Honorable Michael J. Roche,
District Judge.
[Title of Cause.]
PLEA OF NOT GUILTY
This case came on regularly this day for entry
of plea of defendant, Wallace Raymond Shaver,
who was present in proper person and with his
attorney, James Davis, Esq. E. H. Henes, Esq.,
Assistant United States Attorney, was present on
behalf of the United States.
The defendant was called to plead and thereupon
said defendant pleaded *'Not Guilty" to the Indict-
6 Wallace Raymond Shaver vs.
ment filed herein against him, which said plea was
ordered entered.
With the approval of the Court and the consent
of the Government, the defendant waived trial by
jury in writing.
After hearing counsel, it is Ordered that this
case be continued to June 10, 1948, for trial.
(Court.)
[Title of District Court and Cause.]
WAIVER OF JURY TRIAL
In conformity with Rule 23 of the Rules of
Criminal Procedure for the District Courts of the
United States, effective March 21, 1946, we, the
undersigned, do hereby waive trial by jury and
request that the above entitled cause be tried be-
fore the Court sitting without a jury.
Dated San Francisco, California, May 28, 1948.
WALLACE R. SHAVER,
Defendant.
JAMES T. DAVIS,
Attorney for Defendant.
E. HUGH HENES,
Assistant United States
Attorney.
Approved :
MICHAEL J. ROCHE,
Judge, United States District Court, Northern Dis-
trict of California.
[Endorsed] : Filed May 28, 1948. [5]
United States of America 7
District Court of the United States, Northern
District of California, Southern Division
At a Stated Term of the District Court of the
United States for the Northern District of Cali-
fornia, Southern Division, held at the Court Room
thereof, in the City and County of San Francisco,
on Friday, the 11th day of June, in the year of our
Lord one thousand nine hundred and forty-eight.
Present: The Honorable Michael J. Roche,
District Judge.
[Title of Cause.]
MINUTES OF TRIAL
This case came on regularly this day for trial
before the Court sitting without a jury, a trial by
jury having been heretofore waived. The defend-
ant, Wallace Rajnnond Shaver, was present with
his attorney, James Davis, Esq. Daniel C. Deasy,
Esq., Assistant United States Attorney, was jjres-
ent on behalf of the United States. Mr. Davis
made a motion to quash the Indictment, which mo-
tion, after hearing the arguments of counsel, was
ordered denied. R. H. Rundle and Sam Papich
were sworn and testified on behalf of the United
States. Mr. Deasy introduced in evidence and filed
U. S. Exhibits Nos. 1, 2, 3, 4, 6; and offered an-
other exhibit which was marked U. S. Exhibit No.
5 for identification. The United States then rested.
Both sides thereupon rested.
Mr. Davis made a motion for judgment of Not
Guilty, which motion was ordered denied.
8 Wallace Raymond Shaver vs.
The case was submitted to the Court, and due
consideration having been thereon had, it is Or-
dered that the defendant Wallace Raymond Shaver
be, and he is hereby, Adjudged Guilty [6] as
charged in the Indictment.
On motion of Mr. Davis, it is Ordered that this
case be referred to the Probation Officer for in-
vestigation and report.
Ordered case continued to June 18, 1948, for
pronouncing of judgment. Ordered that the de-
fendant be remanded to the custody of the United
States Marshal pending judgment.
Further ordered that U. S. Exhibit No. 5 for
identification may be withdrawn. [7]
District Court of the United States, Northern
District of California, Southern Division
At a Stated Term of the Southern Division of
the United States District Court for the Northern
District of California, held at the Court Room
thereof, in the City and County of San Francisco,
on Friday, the 2nd day of July, in the year of our
Lord one thousand nine hundred and forty-eight.
Present: The Honorable Michael J. Roche,
District Judge.
No. 31417-R
UNITED STATES OF AMERICA,
vs.
WALLACE RAYMOND SHAVER
It Is Ordered that the above named defendant
be placed on Probation for the Period of Five (5)
Years, one of the conditions of his probation be-
United States of America 9
ing that defendant make restitution of the amount
of money involved herein.
It Is Further Ordered that said defendant be
released into custody of Charles H. Upton, Proba-
tion Officer of this Court, that defendant rej^ort
to said Probation Officer as often and in such
manner as directed, and further comply with all
proper terms and regulations prescribed by said
Probation Officer during the probationary period.
It Is Further Ordered that the matter of the
pronouncing of judgment be suspended.
J. C. Astredo, Probation Officer, was present.
JAMES DAVIS,
Attorney for Defendant.
DANIEL C. DEASY,
Assistant U. S. Attorney. [8]
[Title of District Court and Cause.]
NOTICE OF APPEAL
Name and address of Appellant: Wallace Ray-
mond Shaver, 211 ''D" Street, San Rafael, Cali-
fornia.
Name and address of Appellant's Attorney:
James T. Davis, 1095 Market Street, San Fran-
cisco 3, California.
Offense: Violation of Title 18 United States
Code, Section 409.
After trial by the Court a verdict was returned
finding the defendant guilty on both counts of said
indictment on the 11th day of June, 1948.
That thereupon, on the said 11th day of June,
10 Wallace Raymond Shaver vs.
1948, the defendant made a motion for a new trial,
which motion was denied, and the Court thereupon
referred the defendant to the probation officer and
continued the matter of judgment.
That on the 2nd day of July, 1948, the Court
made its judgment and sentenced the defendant
as follows: Five Years Probation.
That defendant appeals from judgment of con-
viction and from the order denying his motion
for a new trial.
Dated July 7, 1948.
JAMES T. DAVIS,
Attorney for Defendant.
Service of Copy of the foregoing Notice of Ap-
peal admitted this 7th day of July, 1948.
FRANK J. HENNESSY,
United States Attorney.
[Endorsed] : Filed July 7, 1948.
[Title of District Court and Cause.]
DESIGNATION OF PARTS OF THE RECORD
DESIRED FOR USE IN APPEAI.
The appellant designates the following as the
Parts of the Record desired for use on appeal:
Indictment.
Plea of Not Guilty.
Reporter's Transcript.
Judgment.
Minutes of the Trial of June 11, 1948.
United States of America 11
STATEMENT OF POINTS UPON AVHTCH
APPELLANT INTENDS TO RELY UPON
APPEAL:
Appellant intends to rely upon the following-
points upon appeal:
1. That the evidence was and is insufficient to
support the verdict of guilty.
2. That the Court erred in denying appellant's
motion to quash indictment.
3. That the Court erred in denying appellant's
motion for a judgment of acquittal.
JAMES T. DAVIS,
Attorney for Appellant.
(Acknowledgment of Receipt of Copy.)
[Endorsed] : Filed Aug. 4, 1948. [10]
[Title of District Court and Cause.]
ORDER EXTENDING TIME TO FILE
TRANSCRIPT OF RECORD
Good Cause Appearing Therefor:
It is hereby ordered that the time within which
appellant may file the Transcript of Record herein
is hereby extended to and including the 27th day
of September, 1948.
Dated this 4th day of August, 1948.
MICHAEL J. ROCHE,
Judge of the District Coui't.
[Endorsed]: Filed Aug. 4, 1948. [11]
12 Wallace Raymond Shaver vs.
[Title of District Court and Cause.]
ORDER EXTENDING TIME TO EILE
TRANSCRIPT OF RECORD
Good cause appearing therefor:
It is hereby ordered that the time within which
appellant may file the Transcript of Record herein
is hereby extended to and including the 5th day
of October, 1948.
Dated this 20th day of September, 1948.
LOUIS E. GOODMAN,
Judge of the District Court.
[Endorsed] : Filed Sept. 20, 1948. [12]
District Court of the United States, Northern
District of California
CERTIFICATE OF CLERK
I, C. W. Calbreath, Clerk of the District Court
of the United States, for the Northern District of
California, do hereby certify that the foregoing
12 pages, numbered from 1 to 12, inclusive, contain
a full, true, and correct transcript of the records
and proceedings in the case of United States of
America, Plaintiff vs. Wallace Raymond Shaver,
Defendant, No. 31417-R, as the same now remain
on file and of record in my office.
I further certify that the cost of preparing and
certifying the foregoing transcript of record on
appeal is the sum of $4.20 and that the said amount
United States of Aynerica 13
has been paid to me by the Attorney for the ap-
pellant herein.
In Witness Whereof, I have hereunto set my
hand and affixed the seal of said District Court at
San Francisco, California, this 1st day of October,
A. D. 1948.
(Seal) C. W. CALBREATH,
Clerk. [13]
In the Southern Division of the United States
District Court for the Northern Division
of California
Before Michael J. Roche, Judge.
No. 31417-R
UNITED STATES OF AMERICA,
Plaintiff,
vs.
WALLACE RAYMOND SHAVER,
Defendant.
REPORTER'S TRANSCRIPT
Friday, June 11, 1948
Appearances: For the United States: Daniel C.
Deasy, Esq., Assistant United States Attorney. For
the Defendant: James T. Davis, Esq. [1*]
The Clerk: U. S. vs. Shaver.
Mr. Deasy: Ready for the Government.
* Pati'e numberino' appearina: at foot of page of original
certified Reporter's Transcript.
1-i Wallace Raymond Shaver vs.
Mr. Davis: Ready, Your Honor.
The Court: Now, how much time do you wish,
counsel ?
Mr. Davis: I don't think it will take more than
half an hour.
Mr. Deasy: I don't think it will.
The Court: Under that statement, I will hold
you to half an hour. You may proceed.
Mr. Davis: Thank you, Your Honor. In the
first place, I would like to apologize for not being
present yesterday.
The Court: Well, I got a report from the Clerk
that cleared the matter up, so you needn't apolo-
gize to the Court at this time.
Mr. Davis: Thank you. Your Honor.
I wish to make this opening statement, if the
Court please: There is no dispute as to the facts
in this case whatsoever. However, this indictment
is the document which has been returned, is the
first one of its kind in this District. It has been
brought under an amendment to the Code which
was passed in 1946. As far as I know, it has not
been passed upon, except in one case in the South-
ern District of California. As I say, there is no dis-
pute as to the facts. However, I felt that in good
conscience, I had to advise my client that in my
opinion there is a serious question of law involved,
and inasmuch as it [2] is a felony, I have to call
to his attention that fact and determine whether
or not he should enter a plea of guilty. Now at this
moment, for the purposes of the record, I believe
I should make a motion to quash the indictment on
United States of America 15
the grounds that it does not state a public offense,
does not state an offense against the United States
of America, on the ground that the section involved
reads in part as follows:
*' Whoever shall * * * being an employee of
any carrier riding in, on or upon any railroad
car, motor truck, steamboat, vessel, aircraft,
or other vehicle of such carrier transporting
passengers or property in interstate or for-
eign commerce and having in his custody funds
arising out of or accruing from such trans-
portation, embezzle or unlawfully convert to
his own use any such funds; * * *"
shall be punished as the law provides.
In other words, the point of my objection is
this: I believe that that particular amendment
which was passed, as I say, in 1946, and the previ-
ous one — there are two amendments — I believe
were passed for the purpose of controlling actual
interstate transportation, or the carriers, while
they were actually engaged in the interstate trans-
portation itself.
Now, as Your Honor is well aware, under the
old statute prior to these amendments, w^hich is
still the law, the property itself has been held to
be in interstate commerce from the time [3] it
leaves the hands of the consignor until it arrives
in the hands of the consignee. That is the property
itself. However, I believe that these amendments
are distinguished as to property, I believe that they
specifically cover only the carrier itself, when the
carrier is moving in interstate commerce. In other
16 WaUace Raymond Shaver vs.
words, there is one case, Stone vs. the United
States, in 153 Fed. 2d 331, which controls amend-
ment No. 4; and in that case the facts were that
the defendants were dining car stewards who,
w^hile a train which was itself moving in interstate
commerce, defrauded the railroad company of meal
checks by a trick and device with service men,
whereby they could cancel one check and not turn
the other one in.
Now, frankly, I don't know about this second
section, Section 5 — the second amendment — which,
as I say, reads as follows:
''Whoever shall * * * being an employee of
any carrier riding in, on or upon any railroad
car, motor truck, steamboat, vessel, aircraft,
or other vehicle of such carrier transporting
passengers or property in interstate or for-
eign commerce and having in his custody
funds arising out of or accruing from such
transportation, embezzle or unlawfully convert
to his o^vn use any such funds; * * *"
shall be punished as the law provides. Now, I
think as the facts will indicate, Your Honor, this
man was a driver for the American Railway Ex-
press. His truck, I believe, admittedly did [4] not
leave the city and county of San Francisco. He
handled local freight, interstate freight and intra-
state freight. There is no doubt about it. There is
no question, and the man so admits, that on two
counts, the facts upon which the two counts of the
indictment are based, that he did have on his truck
two shipments of interstate freight and that he de-
United States of America 17
livered those to the consignees and collected the
money, the C.O.D. and freight charges, and did not
turn it in to the Company.
However, Your Honor, I am not satisfied — al-
though I admit those facts — that he has violated
the law or that his actions constitute an offense
against the United States. That is why I raise the
point.
The Court: Very well. I will hear from the
Government.
Mr. Deasy: As Mr. Davis has advised Your
Honor, this indictment is based upon the 1946
amendment to the statute, which added two new
portions, enlarging the classes of acts made crim-
inal by the statute. They added Section 4, which
makes it an offense to:
a* * * embezzle, steal or unlawfully take by
any fraudulent device, scheme or game, from
any railroad car, motor truck, steamboat, ves-
sel, aircraft, or other vehicle oj)erated by any
carrier, or from any passenger or employee
thereon, when such railroad car or the train
of which it is a part, motor truck, steamboat,
vessel, aircraft, or other vehicle is moving in
interstate or foreign commerce, any [5] money,
baggage, goods, or property, with intent to
convert the same or any part thereof to his
own use, or shall buy, receive, or have in his
possession any such money, baggage, goods or
property, * * *"
Section 5, the one under which this indictment
in this case is laid, reads:
18 Wallace Raymond Shaver vs.
''Whoever shall * * * being an employee of
any carrier riding in, on or upon any railroad
car, motor truck, steamboat, vessel, aircraft or
other vehicle of such carrier transporting
such passengers or property in interstate or
foreign commerce and having in his custody
funds arising out of or accruing from such
transportation, embezzle or unlawfully con-
vert to his own use any such funds; * * *"
Now, the Government's position is that the word-
ing of the statute does not limit the cases to those
where the truck itself actually moved from state to
state, but that it applies to any employee "of any
carrier riding in * * * any * * * motor truck
* * * transporting * * * property in interstate or
foreign commerce and having in his custody funds
arising out of * * * such transportation," which is
the case here.
As I view it, the American Railway Express
Agency is a carrier in the sense that it picks up
and ships, forwards and delivers freight both in-
terstate and intrastate. The shipments involved
here came, one of them, from Omaha, Nebraska
and the [6] other from LaGrange, Illinois. Both
of them were subject to having charges collected
upon delivery. The defendant in the case was. as
is stated in the indictment, an employee of the Rail-
way Express Agency, and while riding on their
truck belonging to the Railway Express Agency,
driving the truck, embezzled and converted to his
own use funds arising from the transportation.
By that I mean funds the collection of which had
United States of America 19
been effected by him from the consignees of the
goods which had come from, in one case, Omaha,
and in the other, LaGrange, Illinois.
Mr. Davis's point is simply this: Does the statute
require that the motor truck should actually move,
physically move, the goods from one state to an-
other, or, in other words, does it cover such a situa-
tion as is charged in the indictment in this case,
where the goods were brought in and then placed
upon the truck in San Francisco for ultimate com-
pletion of the delivery? I feel that the statute
covers the situation we have charged in the indict-
ment in this case. It isn't necessary under the sta-
tute that the motor truck on which defendant was
riding at the time of this embezzlement should be
a truck that actually, physically perhaps, trans-
ported the goods from some other state into
California. It merely completes the shipment. As
Your Honor knows, in these interstate shi])ments
they go through many hands between the consignor
and the consignee. That was the case here. The
goods were picked up by the [7] Railway Express
Agency at the point of shipment and were trans-
ported by means of railroad cars or otherwise into
California, where the ultimate completion of de-
livery was to be made by the motor truck on whicli
this defendant was the driver. I feel that it is cov-
ered by the statute, that the indictment charges the
offense under the statute properly.
The Court: It is my thought that the law as
amended covers the factual situation in this case.
However, I want you to save, for the purpose of
20 Wallace Raymond Shaver vs.
the record, any legal point that you desire to raise
hereafter.
Mr. Davis: Yes, Your Honor.
The Court: You want to develop the factual
situation now!
Mr. Davis: Yes. Then the motion to quash is
denied ?
The Court : The motion to quash will have to be
denied. Call your first witness.
Mr. Deasy: Mr. Bundle.
R. H. RUNDLE
called as a witness on behalf of the United States,
sworn.
The Clerk: Q. Will you state your name?
A. R. H. Bundle.
Direct Examination
Mr. Deasy: Q. What is your occupation, Mr.
Rundle?
A. Special agent, Railway Express Agency.
Q. Did you bring with you to court this morn-
ing certain [8] documents pertaining to a ship-
ment from Omaha, Nebraska to California, during
the month of October of 1947, and the documents
pertaining to a shipment from LaGrange, Illinois,
to San Francisco during the month of September
of 1947?
A. Yes, I have those documents here.
Q. May I see them, please?
A. You want me to explain them to you?
Q. Let me have them first.
The Court: You are familiar with these docu-
ments, counsel?
United States of America 21
(Testimony of R. H. Bundle.)
Mr. Davis: No, I haven't seen them.
Mr. Deasy: I don't know whether you have seen
them; those are the receipts.
Mr. Deasy: Q. Now, Mr. Rundle, I will show
you these documents that you have handed me.
What is this first one I am showing you here?
A. That is the customer's receipt, back in
Omaha, that we issue when we pick up the ship-
ment or when the shipment first comes into our
possession. We issue this receipt with a contract
attached showing that we will deliver this ship-
ment as addressed in San Francisco.
Q. And from whom did you obtain that?
A. From Cornelia Erdman, Bekins Van & Stor-
age Company.
The Court: In the interest of time, show him
the other documents. [9]
Mr. Deasy: Yes, Your Honor.
Mr. Deasy: Q. And this is a similar one on
another shipment, is it?
A. That is the same, a receipt issued at La-
Grange, Illinois, to Mrs. Israel Smith, declaring
that we will deliver that shipment in San Fran-
cisco.
Q. And what are these other two documents
that you have shown me here?
A. These are receipts issued by the driver upon
delivery of these shipments, signed with his in-
itials, and indicated that the money is collected and
how^ much.
Mr. Deasy: Now, the first document handed to
me shows —
22 Wallace Baymond Shaver vs.
(Testimony of R. H. Rimdle.)
The Court: The witness on the stand probably
will recite that better, counsel; he is familiar with
them.
Mr. Deasy: I just wanted to state to Your
Honor that it shows the destination office as San
Francisco, California, the consignee as Cornelia
Erdman, c/o Bekins Van & Storage, at 13th and
Mission Street. The name of the forw^arding office
is Omaha, Nebraska, and the name of the shipper
is also Cornelia Erdman, the street address being
Bekins Van & Storage, 16th and Leavenworth; it
covers seven pieces of H. H. goods. This is a receipt
numbered 4844.
The Court: Very well.
Mr. Deasy: I ask that be marked.
The Court: It may be admitted and marked.
Any objection? [10]
Mr. Davis: No objection.
The Clerk: No. 1.
(Railway Express Agency receipt No. 4844,
referred to above, was thereupon received in
evidence and marked United States Exhibit
No. 1.)
Mr. Deasy: And I have a similar document,
which is marked as receipt No. 2025, showing the
destination office as San Francisco, California, the
consignee as Mrs. Israel Smith, 9 Castle Manor.
LaCxrange, Illinois; the name of the forwarding
office is LaGrange, Illinois, the name of the shipper
is the Jackson Storage & Van Company, and the
shipping consists of one box hair dryer, and ask
that that be admitted also.
United States of America 23
(Testimony of R. H. Rundle.)
The Court: It may be admitted next in order.
The Clerk: No. 2.
(Railway Express receipt No. 2025 was
thereupon received in evidence and marked
United States Exhibit No. 2.)
Mr. Deasy: The next document is a document
entitled ''Receipt for Charges collected from Con-
signee, San Francisco, Calif," dated — it appears to
be 10/3/194. .. It is made out to Bekins in pencil
and in ink to Cornelia Erdman, showing the ship-
per as being "Do318/15," the address as Omaha.
Nebraska. It is marked "Paid," with the initials
"W.R.S.", showing the total amount of $73.29.
The Court: It may be admitted and marked.
The Clerk: No. 3. [11]
(Railway Express receipt referred to was
thereupon received in evidence and marked
United States Exhiint No. 3.)
Mr. Beasy: The next document is a document
marked "Consignee's Receipt for Charges," made
out "To Destination Office, San Francisco, Calif.,
Consignee, Mrs. Israel Smith, 90 Castle Manor
Avenue," with the name of the forwarding office
as LaGrange, Illinois. The shipi)er is shown as
Jackson Storage & Van Company. It is marked
"Paid, W.R.S.," showing a total amount of $18.25,
and this is dated "8-27 — " — and I can't read the
rest. It is "8-2," and something that looks like
"74."
The Court: It may be admitted next in order.
The Clerk: No. 4.
24 Wallace Raymond Shaver vs.
(Testimony of R. H. Rundle.)
(Railway Express receipt referred to was
thereupon received in evidence and marked
United States Exhibit No. 4.)
Mr. Deasy: Q. Now the last two documents
that you handed me, Government's Exhibits No. 3
and 4, the two receipts, did you at any time exhibit
those to the defendant Shaver in this case?
A. Yes, I have.
The Court: Q. Where and under what circum-
stances ?
A. Well, we took a statement from him in our
office, my office at Pier 14.
Q. When? Fix the time.
A. April 7— no, April the 8th. [12]
Q. What time of the day was it?
A. Well, it was approximately — we had been
there all day. It was approximately 10:00 o'clock
in the morning, I would say.
Q. Who was present?
A. Special agent E. W. Hogan and myself.
Q. State what occurred.
A. And the defendant.
Q. State what occurred.
A. Well, we brought Mr. Shaver in to question
him about this here case, and finally Mr. Shaver
admitted it, and we took a statement from him to
this effect on that date.
Q. Have you got that statement?
A. Yes, I have.
The Court: Have you seen this statement,
counsel ?
United States of America 25
(Testimony of R. H. Rundle.)
Mr. Davis: No, I haven't.
Mr. Deasy: I haven't seen it either, Your
Honor.
The Court: You may examine it.
Mr. Deasy: A hxter statement, I might advise
the Court, was taken b}^ Mr. Patrick of the FBI.
which I intended to bring out.
The Court: Is he here?
The Witness: Yes, sir.
The Court: Very well.
Mr. Deasy: At this time I was simply question-
ing this witness as to whether he had at any date
exhibited these two [13] documents to Mr. Shaver.
The Court: You may ask him.
Mr. Davis: I have seen the statement of the
FBI agent, Your Honor, but not this statement.
Mr. Deasy: I haven't seen it myself; it is rather
lengthy, Your Honor.
The Witness: I think it is eight or nine pages.
The Court: Mark it for purposes of identifica-
tion, if there is any question about it.
Mr. Davis: I have no objection to it being
marked for identification.
The Court : It may be admitted and marked for
purposes of identification.
Mr. Deasy: This is a portion of the witness'
files. There is another whole file. Will you take
this —
The Court: Well, you can leave it on. Maybe
there will be no necessity for it. Just leave it on
there.
26 Wallace Raymond Shaver vs.
(Testimony of R. H. Bundle.)
The Clerk: No. 5 for identification.
(Statement of defendant referred to was
thereupon marked United States Exhibit No.
5 for identification.)
Mr. Deasy: Q. Now, did you on the occasion
just referred to exhibit these two documents, Gov-
ernment's Exhibits No. 3 and 4 to Mr. Shaver?
A. That is the last two documents you are
speaking- of?
Q. These are the two. [14]
A. The two consignee receipts? What was your
question ?
Q. Did 3^ou on that date show these to Mr.
Shaver ? A. Yes.
Q. And did you question him concerning' the
handwriting or initials appearing on these docu-
ments ?
A. That's right. He admitted they were his
initials.
Q. His initials, ''W.R.S."?
A. That's right.
Q. Did he tell you whether or not he had
marked them ''Paid"?
A. He admitted that he collected the money
and did not turn it in, if that is what you mean.
Q. And he told you that the writing "Paid,
W.R.S." was written on there by him, is that
right? A. Yes.
Q. What was Mr. Shaver's employment at that
time? A. He was a driver.
Q. A truck driver? A. Truck driver.
United States of America 27
(Testimony of R. H. Rundle.)
Q. For the American Railway Express Agency?
A. That's correct.
Mr. Deasy: No further questions.
The Court: You may take the witness, counsel.
Cross Examination
Mr. Davis: Q. Mr. Rundle, the defendant, Mr.
Shaver, is an employee of the Railway Express
Agency, is that correct? [15] A. He was.
Q. He was? A. Yes.
Q. And on the date named in the indictment he
was an employee, is that correct?
A. No, I believe when he was indicted, I be-
lieve — it is in the file there when we took his resig-
nation. I believe he resigned on the 8th of April;
I am not too sure to that. I would have to refer to
my file.
Q. You probably didn't understand my ques-
tion, Mr. Rundle. On the 30th day of October,
1947, was he an employee of the Railway Express?
A. That's right, he was an employee.
Q. And on the 4th day of September 1947 was
he an employee? A. Yes, he was.
Q. Now, the Railway Express Agency is in the
lousiness of transporting freight, is that correct?
A. That's correct, and express.
Q. And Mr. Shaver, I take it, was, on those
two dates one of your truck drivers, is that cor-
rect? A. That's correct.
Q. What was his route in driving his truck?
A. He had what we would call a "special
route," south of Market Street; in other words, he
28 Wallace Raymond Shaver vs.
(Testimony of R. H. Rundle.)
would cover from the Embarcadero all the way to
the Beach. [16]
Q. Confined to the City and County of San
Francisco? A. That's right.
Q. He never drove his truck outside of the City
and County of San Francisco, is that correct ?
A. I am not too sure about that; I can't answer
that question. He may have went to San Rafael on
occasion, and he might have went to San Pablo on
occasion.
Q. Well, in any event, he didn't drive his truck
outside of the State of California?
A. No, he did not.
Q. And on his truck, what types of freight did
he handle? If I may explain that, rather than a
description, please state whether he handled inter-
state, intrastate or local freight, or what.
A. He went out with both kinds. He would
have interstate and intrastate.
Q. Any local freight? A. He could have.
Q. Could have?
A. Very little. We have been having ver}^ little
of that.
Q. And he drove from the railroad yards usu-
ally to the various consignees, is that correct?
A. That's right.
Q. And made individual deliveries? [17]
Mr. Davis: That is all.
Redirect Examination
Mr. Deasy: Q. Do you know, Mr. Rundle, how
and by what means the shipments covered by these
United States of America 29
(Testimony of R. H. Rundle.)
documents which you have produced arrived at
San Francisco?
A. By train or — to San Francisco?
Q. Correct.
A. They arrived at Oakland Pier by train and
ferried across on the boat to our Pier 14, San Fran-
cisco.
Q. In other words, they came in from Omaha
and LaGrange, respectively, by railroad train?
A. That's right.
Q. And the terminus is at Oakland; that is the
terminus of the trains, at Oakland, and it is then
loaded onto the ferryboat to be brought to San
Francisco? A. That's right.
Q. And you took possession, then, in San Fran-
cisco, is that right? A. That's right.
Q. And they were there loaded on trucks to be
delivered to the consignees?
A. And they were sorted on our platform and
divided into different groups of the city, and Mr.
Shaver, of course, had his own i)articular route, a
section of the city, and he would load his own
trucks. [18]
Q. Now, calling your attention to Government's
Exhibit No. 3, can you explain whether this called
for the collection of some funds by the driver in
connection with that shipment, is that right?
A. That's correct.
Q. And those charges are enumerated on the
document here, is that true?
A. That's right.
30 Wallace Raymond Shaver vs.
(Testimony of R. H. Bundle.)
Q. And they cover value charges of 90 cents,
exi3ress charges of $63.25, tax of $1.92, that is
totaled at $66.07; C.O.D. charges of $6.94, C.O.D.
service charge of 28 cents, to make a grand total of
$73.29, is that correct? A. That's right.
Q. Was the amount to be collected by the driver,
and does this document purport to show that it has
been collected? Is that right?
A. That is correct.
Q. Now, calling your attention to Government's
Exhibit No. 4, this shows, does it, the amount of
charges to be collected by the driver in this receipt ?
A. Yes, it does.
Q. And they call for express charges of $11.73,
tax of 35 cents, to make a total of $12.07; added
are C.O.D. charges of $5.90, C.O.D. service charges
of 28 cents, to make a grand total of $18.25, is that
right? [19] A. That's correct.
Q. And this receipt i)urports to show that it has
been collected by the driver?
A. That's correct.
Mr. Deasy: No further questions.
Recross Examination
Mr. Davis: Q. Mr. Rundle, you are familiar
witli the records kept in the regTilar course of busi-
ness of the Railway Express Agency, are you not?
A. Yes, I am.
Q. And from examining Government's Exhil)its
1, 2, 3 and 4, can you state from those records that
these two deliveries came from the towns in ques-
tion, Omaha and LaGrange?
United States of America 31
(Testimony of R. H. Rundle.)
A. Yes; you see, in order for the defendant to
write that receipt, he would have to have a delivery
sheet, and on that delivery sheet is the same num-
ber that is on this folding receipt, so if you will
notice on these exhibits here, you will see that the
delivery receipt on this one, No. 4844, shows on
this original receipt that I have obtained from
Omaha, which we issued at Omaha, and it carries
that same number.
Q. I see. In other words, when you testify that
these two deliveries arrived here by train into Oak-
land and then were ferried across the Bay, are you
testifying of your own knowledge or from these
documents that you have looked at?
A. Well, from the documents, of course. I
haven't seen the [20] shipments.
Mr. Davis: I have no further questions.
The Court: Step down.
Call your next witness.
SAM PAPICH
called as a witness on behalf of the Government,
sworn.
The Clerk: Q. Will you state your name?
A. Sam Papich.
Direct Examination
Mr. Deasy: Q. And your occupation, Mr.
Papich?
A. I am a special agent of the FBI.
Q. Do you know the defendant in this case, Mr.
Wallace Raymond Shaver? A. I do, sir.
'">- Wallace Raymond Shaver vs.
(Testimony of Sam Papich.)
Q. And did you ever have a conversation with
him concerning the matters which are charged in
this indictment?
A. I had a conversation with him on April 14,
1948, in his apartment on 101 Parnassus Avenue.
Q. And were any other persons present at that
time ?
A. A roommate, Clifford Piltz, was also pres-
ent. That was about 10:00 o'clock in the morning.
Q. And at that time did you identify yourself
to Mr. Shaver as an FBI agent?
A. I did, sir. [21]
Q. And what else, if anything, did you tell him
at that time?
A. I advised Mr. Shaver that I wanted to ques-
tion him regarding the matter of some shipments
which he handled for the Railway Express A2;ency,
and advised him that he had the right to legal
counsel before making any statements. I also ad-
vised him that anything he might say would be
held against him in a court of law. He subsequently
furnished a voluntary statement to me.
Q. You had a conversation with him at that
time, did you? A. Yes, sir.
Q. And from that conversation you prepared a
written statement, did you? A. I did, sir.
Q. And did you exhibit that statement to Mr.
Shaver? A. I did.
Q. And did he read it, do you know?
A. He did read it.
Q. And did you ask him to sign the statement?
A. I did.
United States of America 33
(Testimony of Sam Papich.)
Q. And did he do so? A. He did, sir.
Q. Have you that with you?
A. Yes, I have it here, sir.
Mr. Deasy: Did you see this?
Mr. Davis: I saw the printed one, or the typed
one. [22]
Mr. Deasy: Q. This statement was signed by
Mr. Shaver in your presence, was it?
A. It was, sir.
Q. And in the presence of C. E. Piltz?
A. That's right, sir.
Q. And that is the man you referred to as his
roommate? A. That's right.
Mr. Deasy: At this time I would like to offer it
in evidence.
The Court: It may be admitted.
The Clerk: No. 6.
(The statement referred to above was received
in evidence and marked United States Exhibit
No. 6.)
Mr. Deasy: May I read it at this time:
"San Francisco, California. 4/14/48.
"I, Wallace Raymond Shaver, make the follow-
ing voluntary statement to Sam Papich, who has
identified himself to me as being a Special Agent
of the Federal Bureau of Investigation. No threats
or promises have been made to me. I have been
advised that I can have legal counsel before mak-
ing any statements. I know that anything that I
say can be used against me in a court of law.
34 Wallace Raymond Shaver vs.
(Testimony of Sam Papich.)
"I am 39 years of age and a native of California.
I have a high school education and I attended a
teacher's college for one and a half years. I have
been a truck [23] driver for the Railway Express
Agency, San Francisco, for approximately two and
a half years. 1 resigned April 7, 1948. On or about
October 30, 1947, I delivered a shipment of seven
pieces to the Bekins Van & Storage Co., San Fran-
cisco. I received about $70.00 from Bekins which
amount covered express charges, tax, value charges,
and C.O.D. return charges. I gave Bekins a receipt
and I did not settle this amount with the company.
I kept the money for my own use. I recall that on
the same day I made the delivery to Bekins I made
a delivery of approximately twenty other ship-
ments. I did not make settlements with the Rail-
way Express Agency for the amounts collected on
the deliveries. In addition to the $70.00, I collected
from Bekins, I believe I collected approximately
$80.00 from other deliveries, all of this on the same
day. I kept this money for my own personal use.
''I recall that in the early part of September
1947, I made several deliveries of shipments in San
Francisco. On this particular day I made several
collections totalling to approximately $150.00. I did
not make settlements with the Railway Express
Agency on these collections. I kept this money for
my own personal use. On April 8, 1948, Special
Agent E. W. Hogan of the Railway Express
Agency showed me a receipt issued to a Mrs. Israel
Smith. No. 9 Castle Manor, San Francisco, for a
United States of America 35
(Testimony of Sam Papich.)
delivery of a shipment [24] from LaGrange, Il-
linois. I recognized my initials on this receipt in-
dicating that T made the delivery and collected the
charges. I believe it is one of the deliveries I made
on the day in early September when I kept ap-
proximately $150.00.
"I also recall that in early September, 1947, I
made a delivery to a Mrs. Gordon on Aptos Way,
San Francisco. I collected $30.00 or $40.00 on this
delivery and I did not make a settlement with the
Railway Express Agency. I kept the money for
my own use.
"I wish to add that Special Agent E. W. Hogan
showed me a receipt covering the delivery to
Bekins Van & Storage Co. This receipt showed
that shipment originated in Omaha, Nebraska. I
recognized my initials on this receipt. These initials
would have been made at the time of the collection
for the delivery.
''At this time I wish to state that there is a possi-
])ility there may have (been) other instances when
I made deliveries and kept the collections for my
own use, but to my knowledge at present time,
there were not any instances other than described
above.
"I have read the above statement of two j)ages
including this page and everything is true as well
as T can recall.
"Wallace R. Shaver. [25]
36 Wallace Raymond Shaver vs.
(Testimony of Sam Papich.)
'^ Witnesses:
''Clifeord E. Piltz,
101 Parnassus, San Francisco.
''Sam Papich.
F.B.I., San Francisco.
4/13/48."
Mr. Deasy: I have no further questions.
Cross Examination
Mr. Davis: Q. Mr. Papich, when you ques-
tioned Mr. Shaver, do you know whether any of
these other transactions that he described were in-
terstate shipments? Have you been able to trace
any of these?
A. No, I have'nt, sir.
Q. So that out of the group that he described,
the only two that you know of as being interstate
are the two named in the indictment, is that cor-
rect? A. That's right, sir.
Mr. Davis: That is all, sir.
The Court: Step down.
Mr. Deasy: We rest, Your Honor.
Mr. Davis: I have no witnesses, Your Honor,
and I now wish to make a motion for a directed
verdict of a judgment on the pleadings upon the
same grounds that I made my motion to quash the
indictment. In other words, Your Honor, I feel
that under the previous law the Courts were very
careful to distinguish or to point out that the goods
stolen had to be stolen from some one of the specific
places named in the indictment, [26] such as a
wharf, a railroad car, a truck, and so forth. In
United States of Aynerica 37
other words, it is jurisdictional as to whether or
not the Federal Government has any control over
this property unless it is actually moving in inter-
state commerce.
Now, my feeling is that if we are going to ac-
cept these amendments as extending the law to the
facts as we hear them in this case, it is going to
mean that the Federal Government has jurisdiction
over practically every truck, streetcar or any other
vehicle moving in a locality if it merely happens to
handle a piece of interstate freight. In other words,
I don't believe that the analogy would be strained
to say that if a man got on a municipal railway
car with a package of interstate freight to take it
out to be delivered, that would in effect make the
municipal railway streetcar an interstate carrier;
and I don't think that Congress intended to go
that far.
The Court: I quite agree with you, but we are
here concerned with a man working for the Rail-
way Express, who was engaged in that very ac-
tivity.
Mr. Davis: That is true. Your Honor. However,
they do handle both — they handle local, interstate
and intrastate.
My only point is, Your Honor, that I feel in
order to bring the case within this statute that the
carrier itself has to be transporting passengers or
property in interstate freight, and the fact that
some property on a peculiarly local carrier happens
to be interstate, I don't think brings it within this
[27] classification.
38 Wallace Raymond Shaver vs.
The Court: I think the amendment covers it.
The motion will have to be denied.
Do you want to submit the case?
Mr. Davis: Yes, sir, we will submit it at this
time.
The Court: The Court will have to adjudge the
defendant guilty as charged.
Mr. Davis: If the Court please, as you may
have understood from me making these technical
motions, I feel that in justice to my client, I should
take this matter up on appeal. I think it should be
decided one way or the other, inasmuch as it is the
first case in this District. I would like to move at
this time that the defendant be released on bail
pending his appeal, because I feel that the defend-
ant has admitted all of the facts. He has not denied
any of them. It is really upon my advice that he is
taking this technical move, as I feel he is justified
to do, because if he is not guilty of this offense, I
don't believe that he should have the stigma of
having been found guilty or of pleading guilty to a
felony charge.
The Court: Very well, I will assist you in any
way I can so that there will be a final determina-
tion of this matter. What do you wish, to fix a bail
on appeal?
Mr. Davis: Yes.
The Court: What is the bail?
Mr. Davis: The defendant is out on a $500 bail
now, Your [28] Honor.
The Court: Is there any objection to bail?
Mr. Deasy: No, Your Honor, there is no ob-
jection to continuing on bail.
United States of America 39
The Court: He may remain on bail, and it will
be fixed at $500.
Mr. Davis: Thank you, Your Honor.
The Court: Very well.
Mr. Deasy: Do you want at this time to fix a
date for judgment, Your Honor?
The Court: What day? What date for judg-
ment?
Mr. Davis: What day do you want?
Mr. Deasy: Any time.
Mr. Da\ds: Any date is agreeable to me.
The Court: I will have to take the usual course
and refer the matter, so that the Court can be
properly advised, to the Probation Department for
a pre-sentence report. The defendant will have to
go into custody.
Mr. Davis: Might I suggest two weeks. Your
Honor ?
The Court: Very well, two weeks.
Mr. Davis: Your Honor, I thought that Your
Honor had granted the motion to release the de-
fendant on bail pending his appeal.
The Court: No, I will have to take the usual
course ; I had in mind that bail on appeal, but until
I receive the pre-sentence [29] report — if it is
agreeable to the Government, that thought was
limited to Irnil for the purpose of appeal. Judg-
ment hasn't been imposed yet.
Mr. Davis: I see, Your Honor.
The Court: And the Court wishes to be advised
before sentence is imposed.
Mr. Davis: Might I suggest, then, Your Honor,
40 Wallace Raymond Shaver vs.
— I don't like to attempt to tell the Court that I
am imposing upon your prerogatives —
The Court: No, we proceed here with a degree
of liberty that is surprising at times, if the facts
warrant it.
Mr. Davis: What I meant was this. Your
Honor: Without trying to impose on the preroga-
tives of the Court, from the facts in the case, I
believe that the defendant will appear to be, after
investiagtion, a fit subject for probation. I have
checked his background and I understand he has
had no previous difficulty and never been in trouble
before and that this is his first offense. Therefore
I would suggest that if it is possible that the
probationary period or the period for investigation
be reduced to one week, rather than two weeks.
The Court: Very well, one week. The defendant
may go into custody.
The Clerk: June 18.
[Endorsed]: Filed Sept. 22, 1948. [30]
[Endorsed] : No. 11974. United States Court of
Appeals for the Ninth Circuit. AVallace Raymond
Shaver, Appellant, vs. United States of America,
Appellee. Transcript of Record. Appeal from the
District Court of the United States for the North-
ern District of California, Southern Division.
Piled October 1, 1948.
/s/ PAUL P. O'BRIEN,
Clerk of the United States Court of Appeals for
the Ninth Circuit.
United States of America 41
In the United States Court of Appeals
for the Ninth Circuit
No. 11974
WALLACE RAYMOND SHAVER,
Appellant,
vs.
UNITED STATES OF AMERICA,
Respondent.
STATEMENT OF POINTS UPON WHICH
APPELLANT INTENDS TO RELY AND
DESIGNATION OF PORTIONS OF THE
RECORD FOR THE CONSIDERATION
THEREOF
The Appellant adopts as his Statement of Points
on Appeal the Statement of Points appearing in
the certified typewritten Transcript of Record.
The Appellant designates for printing the en-
tire certified typewritten Transcript of Record.
/s/ JAMES T. DAVIS,
Attorney for Appellant.
[Endorsed]: Filed October 14, 1948. Paul P.
O'Brien, Clerk.
42 Wallace Raymond Shaver vs.
[Title of U. S. Court of Appeals and Cause.]
STIPULATION THAT PORTIONS OF THE
RECORD NEED NOT BE PRINTED
It Is Hereby Stipulated by and between the Ap-
pellant and Respondent, by their respective coun-
sel, that Plaintiff's Exhibits I, II, III and IV
need not be printed as part of the Record on Ap-
peal, but may be considered in their original form
and in such form may be considered a part of the
Record on Appeal.
/s/ FRANK J. HENNESSY,
United States Attorney.
By /s/ DANIEL C, DEASY,
Assistant U. S. Attorney,
Attorneys for Respondent.
/s/ JAMES T. DAVIS,
Attorney for Appellant.
[Endorsed]: Filed October 14, 1948. Paul P.
O'Brien, Clerk.
United States of America 43
[Title of U. S. Court of Appeals and Cause.]
ORDER THAT PORTIONS OF THE RECORD
NEED NOT BE PRINTED
Good Cause Appearing Therefor and pursuant
to the stipulation of the parties hereto, it is hereby
ordered that Plaintiff's Exhibits I, II, III and
IV need not be printed as part of the Record on
Appeal, but may be considered in their original
form and in such form shall be considered a part
of the Record on Appeal.
/s/ WILLIAM DENMAN,
Chief Judge, United States Court of Appeals for
the Ninth Circuit.
[Endorsed]: Filed October 15, 1948. Paul P.
O'Brien, Clerk.
No. 11,974
IN THE
United States Court of Appeals
For the Ninth Circuit
Wallace Raymond Shaver,
vs.
United States of America,
Appellant,
Appellee.
APPELLANT'S OPENING BRIEF.
James T. Davis,
Grant Building, 1095 Market Street, San Francisco 3, California,
Attorney for Appellant.
1948
PAUL P, O'BRIEN,
Subject Index
Page
Jurisdictional statement 1
Statement of facts 2
Statement of points relied on 3
Argument 3
Conclusion 11
Table of Authorities Cited
Cases Pages
Boyd V. United States (CCA. 4), 275 Fed. 16 4
Friedman v. United States (CCA. 1), 233 Fed. 429 4
Sharp V. United States (CCA. 5) 280 Fed. 86 4
Statutes
18 New U.S.C 659 8
18 New U.S.C 660 8, 9
60 Stats. Pub. Law 534 Chap. 606 3
18 U.S.C 409 1, 3, 4, 8, 9, 10
18 U.S.C 412 9, 10
28 U.S.C. Section 41, Subdivision 2 and Section 225, Sub-
divisions (a) and (d) 2
Commentaries
U. S. Code Congressional Sei^-ice 1946, 2-237 Adv. Sheets
No. 6 7
No. 11,974
IN THE
United States Court of Appeals
For the Ninth Circuit
Wallace Raymond Shaver,
A ppellant,
vs.
United States of America,
Appellee.
APPELLANT'S OPENING BRIEF.
JURISDICTIONAL STATEMENT.
This is an appeal from the judgment of conviction
(Tr. 8) of the District Court of the United States
for the Northern District of CaUfornia, Southern
Division, convicting the defendant, after a trial by
the Court, of a violation of 18 U.S.C. 409. The in-
dictment (Tr. 2-3) was in two counts, charging in the
first count, that the defendant, on or about the 30th
day of October, 1947, in the City and County of San
Francisco, State of California, being an employee of
a carrier, to wit. Railway Express Agency, riding
upon a motor truck of such carrier, transporting prop-
erty in interstate commerce and having in his custody
funds arising out of and accruing from such trans-
portation, did embezzle and imlawfully convert to his
own use a portion of such funds, to wit, the siun of
$73.29 which arose out of and accrued from an inter-
state shipment of property from Omaha, Nebraska,
to and into San Francisco, California.
In the second count, a similar offense was charged
in identical language, except as to the date of the
offense, the amount alleged to have been embezzled
and the place of sliipment.
The Court below had jurisdiction under the pro-
visions of Title 28 U.S.C, Section 41, Subdivision 2.
The jurisdiction of this Honorable Court is invoked
under the provisions of Title 28 U.S.C, Section 225,
Subdivisions (a) and (d).
STATEMENT OF FACTS.
There is no dispute as to the facts of this case. It
is admitted that the defendant, on the dates named
in the indictment, was an employee of the Railway
Express Agency driving a truck in San Francisco and
its environs hauling local, interstate and intrastate
freight. While so employed, he did not drive the truck
out of the State of California. On each of the occasions
charged in the indictment the defendant delivered a
package of interstate freight to the consignee, col-
lected the amount due thereon (which consisted of
taxes, express, ser\^ce and C.O.D. charges) and failed
to turn the amount so collected over to his employer.
STATEMENT OF POINTS RELIED ON.
Appellant relies upon the following- point.
That the evidence was insufficient to support either
the verdict of guilty or the judgment and sentence of
the Court for the reason that, admitting all of the
facts to be true, they do not constitute a violation of
the statute in question.
ARGUMENT.
In 1946 Section 409 of Title 18 United States Code
was redrafted.* The crime of embezzlement was added
and the Section was divided into five paragraphs of
which Paragraph 5 is new matter. The indictment
in this case was brought under the provisions of said
Paragraph 5 and, as far as we have been able to
ascertain, this is a case of first impression. The in-
dictment now before the Court is the first to be
brought under said Paragraph 5 in this District.
Paragraph 5 reads as follows:
'M^eing an employee of any carrier riding in, on
or upon any railroad car, motortruck, steamboat,
vessel, aircraft, or other vehicle of such carrier
transporting passengers or property in interstate
or foreign commerce and having in his custody
funds arising out of or accruing from such trans-
portation, embezzle or imlawfully convert to his
own use any such funds ; ' '
shall be found guilty of a felony.
*60 Stats. Pub. Law 534, Chap. 606.
It is the contention of the appellant that in order
to constitute a violation of this paragraph the vehicle
of the carrier upon which the defendant is riding as
an employee must, at the time of the embezzlement,
be moving in interstate or foreign commerce, and that
it is not sufficient if, as in this case, the vehicle is a
purely local one although the goods or the property
being transported may be of an interstate or foreign
character.
In the first place it is necessary to draw a distinc-
tion between the property being transported and the
carrier transporting the same. Under the provisions
of Paragraph 2 of Section 409 which covers the lar-
ceny of property from carriers engaged in interstate
or foreign commerce it has been imiformly held that
the property is in interstate commerce from the time
it leaves the hands of the consignor until it readies
the hands of the consignee.
Boyd V. United States (CCA. 4), 275 Fed. 16;
Friedman v. United States (CCA. 1), 233 Fed.
429;
Sharp V. United States (CCA. 5), 280 Fed. 86.
The language of Paragraph 1, however, covers not
only ''goods or property moving as interstate or for-
eign commerce" but also "goods or property * * *
which are a part of or which constitute an interstate
or foreign shix)ment of freight or express."*
It does not follow, therefore, that because the goods
or property are themselves in interstate commerce.
*18 U.S.C. 409, Par. 2.
that the carrier moving them at any particular time
is moving in interstate commerce.
It is a common practice to ship small lots of goods
to a carloading company at a central point for trans-
shipment to their ultimate destination. The appellant
contends, for example, that if a consignor ships goods
from New York to Chicago for the purpose of having
them loaded into a car with other goods for shipment
to San Francisco and the goods are moved from one
depot to another in Chicago, while the goods them-
selves are part of an interstate shipment, the carrier
so moving them from one depot to another in Chicago
is not moving in, or engaged in, interstate commerce.
Keeping in mind that the power of Congress to pass
legislation of this type comes from the Commerce
Clause of the Constitution, and that Congress is aware
of its limited powers, in such matters, it is the appel-
lant's opinion that the legislative body in enacting
Paragraph 5 meant exactly what it said, i.e., that it
was unlawful for any person, being an employee of
a carrier, riding in or upon any railroad car, motor-
truck, etc., of such carrier transporting passengers or
property in interstate or foreign co^nmerce, to em-
bezzle funds in his custody arising out of or accruing
from such transportation. (Emphasis supplied.) Any
reasonable interpretation of this language makes it
apparent that the word "transporting" governs the
words "railroad car, motor truck," etc., and not the
words "passengers or property." In order to accept
the Grovernment's theory of the case, it is necessary
to distort the language of the section until it reads
as follows: ''it is unlawful for any person, being an
employee of a carrier, riding in or upon any railroad
car, motortruck, etc., of such carrier, transporting
passengers or property which are moving as or are
a part of an interstate or foreign shipment."
It is our opinion that Congress did not so intend,
and thus to make it a federal offense for a, as in this
case, driver of a local truck to embezzle funds arising
from goods which were part of an interstate shipment
which were commingled on his truck with local and
intrastate freight.
As to the intention of Congress, the Report of the
House Committee on the Judiciary is persuasive.
Prior to the redrafting of the Section and the addi-
tion of Paragraph 5, the Section covered four general
situations :
(a) Whoever shall unlawfully break the seal of any
railroad car containing interstate or foreign shipments
of freight or shall enter such car with intent to com-
mit larceny therein;
(b) Whoever shall steal, etc., from any railroad
car (or other specified place) goods moving as or
which are a part of or which constitute an interstate
shipment of freight, or shall receive the same;
(c) Whoever shall steal, etc., any baggage which
shall have come into the i^ossession of any common
carrier for transportation in interstate conmierce or
shall steal the contents thereof or shall receive the
same;
(d) Whoever shall steal or shall unlawfully take
by any fraudulent device, scheme or game, from any
railroad car or from any passenger thereon, when such
car is a part of a train moving in interstate commerce
any money, baggage, goods or chattels or shall receive
the same;
An analysis of the Section as it stood prior to its
redrafting indicates that in (a), (b) and (c) the test
of jurisdiction is the character of the goods and not
the status of the carrier ; the only departure from this
rule is in (d) where it is clearly stated that the test
of jurisdiction shall be '^whem such car is a part of
a train moving in interstate commerce."
In recasting the Section which included the addi-
tion of Paragraph 5, the Committee reported as
follows :
*'The purpose of this legislation is to broaden
the scope of the present Larceny Act. The exist-
ing statute applies only to larceny of interstate
or foreign shipments made by rail, highway or
water. The pending hill combines the crime of
embezzlement tvith that of larceny and makes the
entire act applicable to air transportation. The
penalty remains the same as in the present law."
(H.R. No. 116, Oct. 10, 1945, U. S. Code Con-
gressional Service 1946, 2-237 Adv. Sheets No. 6;
emphasis supplied.)
We respectfully submit that although Congress
added the crime of embezzlement to the Section it did
not intend to change the test of jurisdiction in this
one instance but rather, that the test should remain
8
the same, that is, embezzlement of property moving
as or Avhich are a part of or Avhich constitute an inter-
state sliipment of freight or, under (d) infra, em-
bezzlement from a railroad car or a passenger while
on a railroad car, when such car is a part of a train
moving in interstate commerce.
We respectfully submit that had Congress intended
to radically change the statute in this one particular
and, in effect, to confer the status of an interstate
carrier upon a local truck merely l^ecause it carries,
along with other property, goods which are part of
an interstate shipment, the Report of the Committee
would have so stated.
While it is not controlling, it is equally persuasive
that the possible ambiguity present in Paragraph 5
has been clarified by the new Title 18 of the IT. S.
Code which became effective on September 1, 1948.
In the new Code Section 409 has been redrafted into
two sections, i.e.. Sections 659 and 660. Section 659
covers all of the matter formerly contained in Section
409, Paragraphs 1 to 4 inclusive. Paragraph 5, with
which Ave are concerned, is now covered by Section
660. The language in the pertinent portions of Sec-
tion 660 are the same with one notable exception: the
language in Section 409, Paragraph 5, '' vehicle of
such carrier transporting passengers or property in
interstate or foreign commerce," has been changed, in
Section 660, to 'S^ehicle of such carrier mo^dng in
interstate commerce." We respectfully submit that
if an ambiguity can be spelled out of the language
"transporting passengers or property in interstate or
foreign commerce" as used in Section 409, it has been
effectively removed from Section 660 by the use of
the word "moving." Of course, inasmuch as the in-
dictment in this case was brought under Section 409
the language in the new Code does not control. It is,
however, persuasive in, showing the true intent of
Congress when both Acts were passed.
It is to be noted also that at the time this indict-
ment was returned Section 412 of the U. S. Code was
also in effect. This section reads in part as follows:
"Every president, director, officer or manager
of any firm, association or corporation engaged
in commerce as a common carrier who embezzles,
steals, * * * any of the moneys, funds * * * of
such firm * * * arising or accruing from, or used
in such commerce * * * shall be deemed guilty
of a felony."
By reading the two sections together we come to
one inevitable conclusion. Congress intended that an
officer of a common carrier could be guilty of the
crime of embezzlement wherever funds of the carrier
were embezzled, while a mere employee of a carrier
could be guilty of embezzlement only if he embezzled
funds of the carrier while riding upon a vehicle of
the carrier which was itself moving in interstate com-
merce. Congress undoubtedly believed that an em-
bezzlement, such as in this case, by local employee of
a carrier, operating a purely local truck could be more
effectively prosecuted by the 'States.
10
If Congress had wished to achieve the result con-
tended for by the G-overnment it would have more
properly and logically amended Section 412 by adding
the word employee to the list of persons who could
be guilty of the crime of embezzlement of the carrier's
funds, wherever the emlDczzlement occurred.
Finally, if we adopt the interpretation of Section
409 argued for by the Government, it is obvious that
the evidence in this case is insufficient to support the
verdict. According to the Government, the lower
Court had jurisdiction of this offense, and the evi-
dence was sufficient to support the judgment, not be-
cause the vehicle was moving in interstate commerce
but because it w^as transporting property which was
in interstate commerce.
A search of the record fails to disclose a scintilla
of evidence that, on the dates charged in the indict-
ment, there was any "property in interstate com-
merce" upon the vehicle other than the package which,
on each occasion the appellant delivered. It was estab-
lished also that, on each occasion, the package was
delivered, the funds collected and allegedly embezzled.
When the package was delivered it ceased to be a
part of an interstate shipment. Therefore, there is a
total failure of proof, essential imder the Govern-
ment's theory of the case, tJiat at the time of the
alleged embezzlement or at any time thereafter the
defendant was riding upon a vehicle of a carrier,
"transporting passengers or property in interstate or
foreign commerce."
11
CONCLUSION.
For the reasons stated, we respectfully submit that
the judgment and sentence appealed from should be
set aside.
Dated, San Francisco, California,
December 1, 1948.
Respectfully submitted,
James T. Davis,
Attorney for Appellant.
No. 11,974
IN- THE
United States Court of Appeals
For the Ninth Circuit
Wallace Raymond Shaver,
Appellant,
vs.
United States of America,
Appellee.
BRIEF FOR APPELLEE.
Frank J. Hennessy,
United States Attorney,
Daniel C. Deasy,
Assistant United States Attorney,
Post Office Building, San Francisco 1, California,
Attorneys for Appellee,
Subject Index
Page
Jui'isdictioiial Statement 1
Statement of Pacts 1
Argument 2
Conclusion 10
Table of Authorities Cited
Cases Page
Boyd V. U.S. (CCA-4), 275 F. 16 8
Friedman v. U.S. (CCA-1), 233 F. 429 8
Sharp V. U.S. (CCA-5), 280 F. 86 8
White V. U.S., 273 F. 517 4
Statutes
U.S. Code, T. 18, § 409, as amended in 1946 (60 Stats. 656) ... 4
No. 11,974
IN THE
United States Court of Appeals
For the Ninth Circuit
Wallace Raymond Shaver,
Appellant,
vs.
United States of America,
Ajypellec.
BRIEF FOR APPELLEE.
JURISDICTIONAL STATEMENT.
The appellee joins in the statements made in appel-
lant's opening brief as to the jurisdiction of the Dis-
trict Court of the United States for the Northern Dis-
trict of California, Southern Division, to try this case,
and the jurisdiction of this Honorable Court to con-
sider the pending appeal from the District Court's
judgment of conviction. (Appellant's Opening Brief,
pp. 1 and 2.)
STATEMENT OF FACTS.
The facts in this case are undisputed. The appellant
was employed as a truck driver by the Railway Ex-
press Agency, a carrier of freight and express, on the
dates named in the respective coimts of the indict-
ment. (Tr. 27.) He drove a truck belonging to the
Railway Express Agency in and about San Francisco ;
he did not drive the truck out of the State of Califor-
nia. (Tr. 28.) In the course of his duties he trans-
ported local, intrastate and interstate freight, making
deliveries from the railroad yards to the consignees.
(Tr. 28.)
On each of the two occasions mentioned in the in-
dictment, the appellant delivered an interstate ship-
ment of freight to the consignee and collected charges
arising out of and accruing from the transportation
of the freight in interstate commerce, including taxes,
express charges, value charges, C.O.D. charges and
C.O.D. service charges. (Tr. 30.) He embezzled these
funds and converted them to his own use. (Tr. 34-35.)
ARGUMENT.
The indictment in this case is the tirst to be returned
in this District charging a violation of U.S. Code,
Title 18, §409, as amended in 1946 (60 Stats. 656).
Prior to that amendment §409 made it a criminal
offense to :
1. Break the seal of a railroad car containing
interstate shipments of freight or express with
intent to commit larceny.
2. Enter such a car with like intent.
3. Steal, take, carry away or conceal, or by
fraud or deception obtain with intent to convert
to one's own use, from certain specified places,
any goods moving* as or which are a part of or
which constitute an interstate shipment of freight
or express.
4. Buy, receive or have in one's possession
any such goods, knowing them to have been
stolen.
5. Steal, take, carry away, or by fraud or
deception obtain with intent to convert to one's
own use any Imggage which shall have come into
the possession of any common carrier for trans-
portation in interstate commerce.
6. Break into, steal, take, carry away, or con-
ceal any of the contents of such baggage.
7. Buy, receive or have in one's possession
any such baggage or contents, with knowledge
that it was stolen.
These categories may be summarized by stating that
they penalize the burglary of a railroad car, the lar-
ceny of goods moving as or comprising a part of an
interstate shipment, larceny of baggage or the con-
tents of baggage entrusted to a carrier for interstate
shipment, and receiving propei'ty stolen in violation
of this section.
^'The essential object of this statute is to
create, define, and punish the offense of abstract-
ing or unlawfully having in possession goods
4
while in interstate or foreign transit, and thereby
interfering with interstate or foreign commerce."
White V. U.S., 273 Fed. 517.
By amendment in 1946, Title 18 U.S. Code § 409
was revised and expanded in several respects.
1. It was reworded to make it applicable to
burglary of vessels, aircraft, wagons and motor
trucks, as well as railroad cars.
2. It included embezzlement of goods moving
as or which are a part of or which constitute an
interstate shipment of freight or express, and
added aircraft and air navigation facilities to the
places from which larceny or embezzlement is
prohibited.
3. It included embezzlement of baggage or
contents of baggage entrusted to a carrier for
interstate transportation.
4. It made it a criminal offense to '' embezzle,
steal, or unlawfully take by any fraudulent device,
scheme, or game from any railroad car, motor
truck, steamboat, vessel, aircraft, or other vehicle
operated by any carrier, or from any passenger
or employee thereon, when such railroad car, or
the train of which it is a part, motor truck, steam-
boat, vessel, aircraft, or other vehicle is moving
in interstate or foreign commerce any money,
baggage, goods or property" with intent to con-
vert the same to one's own use, or to buy, re-
ceive or have in one's possessioii any such money,
baggage, goods or property, knowing the same to
have been embezzled or stolen.
5. It made it a criminal offense for anyone
who shall ''being an employee of any carrier rid-
ing in, on or upon any railroad car, motor truck,
steamboat, vessel, aircraft or other vehicle of
such carrier transporting passengers or property
in interstate or foreign conmierce and having in
his custody funds arising out of or accruing from
such transportation, embezzle or unlawfully con-
vert to his own use any such funds."
It will readily be seen that in addition to enlarging
the scoi^e of the several categories of offenses de-
nounced by the old statute, the amendment set up two
entirely different classes of offenses. Federal juris-
diction over which is dependent upon totally differ-
ent aspects of interstate commerce.
In the old statute, the property involved in the
larceny or receiving was only such property as con-
stituted an interstate shipment, or which was actually
moving in interstate commerce.
The amended statute (Subsection (4)) makes it
an offense against the United States for anyone to
commit a larceny or embezzlement of any property
upon a vehicle when that vehicle is moving in inter-
state or foreign commerce. The test here is not
whether the property is part of or constitutes an
interstate or foreign shipment. The test is whether
the vehicle is moving in interstate or foreign com-
merce. Larceny upon a transcontinental train or air-
plane is made a Federal offense, somewhat akin to
larceny upon the high seas, or upon lands within the
exclusive jurisdiction of the United States. This
paragraph of the amended statute applies to larceny
or embezzlement of money or property which is not
moving in interstate or foreign commerce, but which
is stolen or embezzled from a vehicle which is so mov-
ing. It would apply, for example, to the theft of
property belonging to a passenger traveling from San
Francisco to Truckee, California, on a train en route
from San Francisco, California to Ogden, Utah.
Subsection 5 of the amended statute, imder which
the indictment in this case is laid, makes it an offense
to embezzle fmids accruing from the interstate trans-
portation of freight or express. The embezzlements
punishable imder this paragraph of Section 409 are
by the terms of the statute only embezzlements com-
mitted by employees of a carrier riding upon vehicles
of their employer, which vehicles are transporting
passengers or property "in interstate or foreign com-
merce".
In his brief appellant argues that this means em-
bezzlements of funds accruing from the interstate
transportation of property which has been carried
on the vehicle upon which the employee is riding,
FROM ONE State to another.
We do not believe any such interpretation to be
the intention of Congress, nor do we feel that it is a
proper construction of the language of the statute.
Had Congress intended to penalize only such em-
bezzlements, there would have been no necessity to
enact this portion of the statute at all, since such em-
bezzlements are included within the language of sul)-
division (4) "embezzle * * * or imlawfully take * * *
from any * * * motor truck when such * * * motor
truck is moving in interstate or foreign commerce,
any money * * * Avith intent to convert the same or
any part thereof to his own use".
We believe that subsection 5 of § 409 is intended
to and does by its very terms penalize embezzlements
by a carrier's transit employees (as opposed to office
employees) who ride upon the carrier's vehicles,
making deliveries of property which is or constitutes
a X)art of an interstate shipment of freight or express.
A vehicle which makes the initial or the terminal
haul is as much engaged in transporting property in
interstate commerce as the vehicle wliich carries the
property across the line from one State to another.
The shipments delivered by appellant in this case
were ''door to door" shipments. (Tr. 21.) From the
time they left the possession of the consignor until
they were delievered by appellant to the consignees
they were being transported in interstate commerce.
While making those deliveries and collecting the
charges accruing from the interstate shipment of the
goods so delivered, appellant was riding upon a ve-
hicle of the carrier "transporting property in inter-
state coimnerce".
8
Property is in interstate commerce from the time it
leaves the hands of the consignor mitil it reaches the
hands of the consignee.
Boyd V. U.S. (CCA-4), 275 Fed. 16;
Friedman v. U.S. (CCA-1), 233 Fed. 429;
Sharp V. U.S. (CCA-5), 280 Fed. 86.
Argument is made in appellant's brief that if the
statute means what appellee contends it does mean,
then we must conclude that the jurisdiction of the
United States to regulate commerce between the
States extends to regulation of every vehicle upon
which a package constituting a part of an interstate
shipment might be carried. We do not believe any
such conclusion follows from our argument in this
case.
Appellant concedes that the shipments delivered by
him comprised interstate shipments until delivered
to the consignees. It is likewise undisputed that the
funds embezzled by appellant accrued from interstate
transportation of the ])roperty; but the argument is
advanced that at the moment the embezzlement in
each instance took place, there was no interstate ship-
ment remaining undelivered on the appellant's truck,
and therefore he could not have been riding upon a
truck transporting proi)erty in interstate commerce,
and therefore the embezzlements are not covered by
the statute.
We think this argument is without merit. From a
reading of the amended statute in its entirety it seems
obvious that in enacting Subdivision 5, Congress in-
tended to penalize exactly the thing which was done
by appellant in this case, namely, the embezzlement
of funds accruing from interstate transportation of
property by the employees of carriers who have col-
lected the funds after making delivery of the prop-
erty. In the ordinary course of events, the charges
would not accrue until the transportation had been
completed, and the funds would not be collected until
the delivery had been made.
The regulation of interstate commerce is within the
power of Congress; and this has been held to include
the power to fix rates and charges for transportation
of property. In like manner, Congress has power to
X^rovide penalties for interference with interstate com-
merce, including such activities as larceny and em-
bezzlement of property moving in interstate commerce
or comprising interstate shipments of freight or ex-
press. It seems to us that Congress may also make it
a criminal offense for employees of carriers engaged
in interstate commerce to embezzle the funds accruing
from interstate shipments and that the statute in-
volved in this case was intended to and does have
that effect, and that the argument that the vehicle
must proceed across a State line, or that at the time
of the embezzlement there must remain on the vehicle
another undelivered interstate shipment is without
merit.
10
CONCLUSION.
For the reasons stated we respectfully submit that
the judgment of the District Court should be affirmed.
Dated, San Francisco, California,
January 7, 1949.
Respectfully submitted,
Frank J. Hennessy,
United States Attorney,
Daniel C. Deasy,
Assistant United States Attorney,
Attorneys for Appellee.
No. 11975 and No. 12012
IN THE
Oltrrmt Olourt of Appeals
FOR THE NINTH CIRCUIT
F. E. NEMEC, Appellant,
vs.
UNITED STATES OF AMERICA, ( No. 11975
Appellee.
BONEWICZ X. DAWSON, Appellant
^MERICi^
Appellee.
UNITED STATES OF AMERICA, ' ^^' ^^^^^
On Appeal from the District Court of the United
States, for the Eastern District of Washington
BRIEF FOR THE APPELLEE
Harvey Erickson,
United States Attorney
Frank R. Freeman,
Assistant United States Attorney,
SREEH-HUCHES PTS CO., SPOKANE
JUN 3-1949
INDEX
Pages
Statement of Jurisdiction 1
Statement of the Case 1
Appellant Nemec's Assignments of Error 18
Argument 18
Appellant Dawson's Assignments of Error 27
Argument 27
Conclusion -... 39
CITATIONS
Cases :
Blumenthal v. United States, (CCA 9)
158 F. (2d) 883, page 891 33
Boushea v. United States, 173 F. (2d) 131 20
Brady Y. United States, (CCA 9) 26 F. (2d)
400 Cert. Den. 278 U. S. 621 23
Bravermanw. United States, 317 U. S. 49 34
Grunberg v. United tSates, (CCA 1) 145
Fed. 81, page 86 36
Kotteakos v. United States, 328 U. S. 750 19
Krulewitch v. U^iited States, 336 U. S. 440 32
Nye & Nissen v. United States, (CCA 9)
168 F. (2d) 846 34
Pinkerton v. United States, 328 U. S. 640 40
Rosev. United States, (CCA 9) 149 F. (2d) 755 33
Securities & Exchange Commission v. Joiner,
320 U. S. 344 39
statutes :
Pages
Title 15, Sec. 77 (b), USCA ._..._. 38
Title 15, Sec. 77 (q), USCA ...1, 2, 7, 8
Title 18, Sec. 88, USCA 1
Title 18, Sec. 338, USCA 1, 2
Title 28, Sec. 1291, USCA 1
Miscellaneous :
Sec. 17 (a) (1), Securities Act of 1933
as Amended -7, 8
No. 11975 and No. 12012
IN THE
(Hxvtmt Olourt of Ap^:i^al0
FOR THE NINTH CIRCUIT
F. E. NEMEC, Appellant,
vs.
UNITED STATES OF AMERICA, ( No. 11975
Appellee.
BONEWICZ X. DAWSON, Appellant
vs.
UNITED STATES OF AMERICA,
Appellee,
No. 12012
On Appeal from the District Court of the United
States, for the Eastern District of Washington
BRIEF FOR THE APPELLEE
STATEMENT OF JURISDICTION
The Circuit Court of Appeals has jurisdiction of
the instant case under the provisions of Title 28, Sec.
1291, USCA, and the prosecution in the lower court
was based upon Title 18, Sees. 338 and 88, and Title
15, Sec. 77 (q).
STATEMENT OF THE CASE
On the 5th day of May, 1948, a United States
Grand Jury sitting at Spokane, Washington, returned
an indictment against appellants F. E. NEMEC,
BONEWICZ X. DAWSON and others. This indict-
ment in substance charged as follows:
"Count I.
That between January 1, 1945 and continuing
to the date of indictment, the defendants, F. E.
NEMEC, BONEWICZ X. DAWSON, STANLEY
E. RICHARDSON, DR. HAROLD R. RECTOR,
WESTCOTT B. CLARKE, FLORA L. CAR-
PENTER, and H. P. SCHWARTZ, conspired,
combined, confederated and agreed with each
other and with divers other persons whose iden-
tity is to the grand jurors unknown * * * * to
violate Title 18, Sec. 338, U.S.C.A., by devising
***** a scheme and artifice to defraud in-
vestors and for obtaining money and property
from investors in investment contracts and cer-
tificates of interest or participation in profit
sharing agreements relating to placer and lode
gold mining claims and operations in Sierra and
Butte Counties, California, and ore processing
operations at Crescent City and Los Angeles,
California * * * * to be executed through * * * *
the United States mails by means of false and
fraudulent pretenses, representations and prom-
ises, the defendants well knomng at the time that
said pretenses, representations, and ^^romises
would be false when made; and.
Violations of Title 15, Sec. 77 (q), U.S.C.A.,
by using * * * the United States mails to employ
said scheme and artifice to defraud said invest-
ors * * * *,
That said false and fraudulent pretenses, rep-
resentations and promises included, among
others, the following:
1. That said defendants, doing business as
Northwest Mining and Engineering Company, a
partnership, would and did locate valid, patent-
able, placer mining claims for investors on Gov-
ernment land, open for the location of mineral
placer claims, in Sierra County, California, which
claims were highly valuable.
2. That under state and federal laws relating
to the location of mining claims, no individual
or corporation could locate more than one 20-
acre placer gold mining claim.
3. That hydraulic placer mining operations on
the Sierra County sites had been prevented and
rendered illegal by statute and injunction from
1886 until immediately prior to World War II.
4. That the placer mining claims located and
to be located for investors had valuable standing
timber which could and would be removed and
sold by Northwest Mining & Engineering Com-
pany, the proceeds of which would inure to the
benefit of the claim holders in an amount suffi-
cient to repay the total original investments for
their claims.
5. That the placer claims which defendants
would and did locate for investors in Sierra
County, California, contained values in gold of
40 cents per cubic yard, or over, and would pro-
duce net monthly returns to investors of $30.00
for each claim located.
6. That the defendants, doing business as
Northwest Mining & Engineering Company, had
acquired all necessary water rights, water con-
duit ditches, and rights of way necessary to
enable them to efficiently hydraulic the claims
which they would and did locate for investors in
Sierra County.
7. That defendants and Northwest Mining &
Engineering Company had adequate and ample
finances with which to set up and carry on a
large scale placer mining operation on claims
which they would and did locate for investors.
8. That defendants had arranged for the pur-
chase and operation of the Sierra Butte Mine,
the earnings from which would inure to the bene-
fit of all investors for whom defendants located
placer mining claims.
9. That the defendants through Northwest
Mining & Engineering Company, had discovered
in the immediate vicinity of their placer mining
operations in Sierra County, California, a vein
disclosing valuable gold lode or quartz deposits.
10. That the defendants, through Northwest
Mining & Engineering Company, would and did
locate for investors valid, legal, lode mining
claims consisting of eight such 20-acre lode
claims on government land, open for location of
lode mining claims, in Sierra County, California.
11. That the lode claims located and to be lo-
cated in Sierra County, California, by defend-
ants for inevstors had valuable standing tim-
ber which could and would be removed and sold
by Northwest Mining & Engineering Company,
the proceeds from which would inure to the bene-
fit of the claimholders in an amount sufficient
to repay the total original investments for their
claims.
12. That based upon successful placer mining
operations of the Northwest Mining & Engineer-
ing Company at Sierra City, California, an early
distribution of substantial earnings had been
and would be made to investors in lode claims.
13. That the defendants, doing business as
Northwest Mining & Engineering Company,
would and did locate valid, patentable, placer
mining claims for investors on government land,
open for location of mineral placer claims, along
and adjacent to the ancient Mammouth, Magelia
and Nimshew channels in Butte County, Cali-
fornia.
14. That defendants could and would operate
all said placer mining claims located for investors
in Butte County, California, in a single unified
underground placer mining operation.
15. That the defendants, through Northwest
Mining & Engineering Company, had acquired
all necessary mining and tunnel rights to a
property in Butte County, California, commonly
referred to as the California Treasure Box, Ltd.,
through which a unified underground placer
mining operation on claims located for investors
could and would be carried on.
16. That the defendants, through Northwest
Mining & Engineering Company, would and did
thoroughly and adequately sample and test for
gold values the claims in Butte County, Cali-
fornia, which they would and did locate for in-
vestors.
17. That the defendants, through North-
v/est Mining & Engineering Company, had per-
formed all necessary preliminary engineering
work to permit immediate commencement of un-
derground placer mining operations on claims
in Butte County, California, which they would
and did locate for investors.
18. That Northwest Mining & Engineering
Company had retained the sei'vices of Dr. Har-
old R. Rector, chemist, nuclear physicist, eminent
chemical engineer, and key atomic scientist in
the development of the atomic bomb at the Han-
ford Project.
19. That said defendants, doing business as
Northwest Mining & Engineering Company and
Crescent City Mining Company, had obtained
exclusive rights to a secret process invented by
Dr. Harold R. Rector by means of which a com-
mercial and highly profitable recovery of gold
and other metals could be made from the black
sands and other ores in the vicinity of Crescent
City, California."
This count further set forth fifteen overt acts al-
legedly committed by the defendants in pursuance
of said conspiracy and to effect its objective.
"COUNT II.
1. That prior to January 1, 1945, and con-
tinuing to November 6, 1947, the defendants,
F. E. NEMEC and BONEWICZ X. DAWSON,
devised * * * a scheme * * * * to defraud in-
vestors * * * * in investment contracts and
profit sharing agreements relating to the loca-
tion and operation of placer and lode gold min-
ing claims in Sierra and Butte Counties, Cali-
fornia, and to ore processing operations at Cres-
cent City and Los Angeles, California, by means
of fraudulent pretenses, representations and
promises, including among others those mention-
ed in Count I of this indictment and numbered
from "1" to "19", inclusive* * * knowing that
said pretenses, representations and promises
would be false when made.
2. That on the 13th day of December, 1945,
* * * * the defendants, F. E. NEMEC and
BONEWICZ X. DAWSON,^ for the purpose of
executing the aforesaid scheme * * * * caused
to be sent and delivered * * * * by the post of-
fice establishment of the United States, a letter
addressed to Mr. Henry L. Harris, 921 Snow,
Richland, Washington."
"COUNT III"
Count III was dismissed on motion of the United
States Attorney prior to the trial.
"COUNT IV.
1. That the defendants F. E. NEMEC and
BONEWICZ X. DAWSON, so having devised
the scheme and artifice to defraud described in
Count I of this Indictment * * * * did in the
sale of a security, to- wit: investment contracts
and profit sharing agreements relating to lo-
cation and operation of placer and lode gold
mining claims in Sierra and Butte Counties,
California, and ore processing operations at
Crescent City and Los Angeles, California, by
use of the United States mails, employ the said
scheme * * * * in the manner following, to-
wit:
2. The said defendants on or about the 9th day
of November, 1946, * * * * did cause to be de-
livered by the mails of the United States * * * *
a certain letter addressed to Robert L. and Cath-
erine U. Alderson, Route No. 8, Yakima, Wash-
ington, the said letter having * * * * on or
about the 8th day of November, 1946, been placed
* * * * by said defendants in an authorized de-
pository for mail matter to be sent or delivered
by the post office establishment of the United
States according to the directions thereon."
in violation of Title 15, Sec. 77 (q) (a) (1) USCA,
also known as Sec. 17 (a) (1) of the Securities Act
of 1933, as amended.
"COUNT V.
1. The grand jury realleges all of the allega-
tions of Count IV of this Indictment except those
contained in the second paragraph thereof.
2. The said defendants on or about February,
1946 * * * * did cause to be delivered by the
mails of the United States * * * * a certain
mimeographed sales brochure addressed to G. E.
Hall, 1425 Kimball, Richland, Washington; the
said sales brochure having theretofore been
8
placed or caused to be placed by the said de-
fendants in an authorized depository for mail
matter in Seattle, Washington, to be sent or de-
livered by the post office establishment of the
United States according to the directions there-
on."
in violation of Title 15, Sec. 77 (q) USCA, also
known as Sec. 17 (a) (1) of the Securities Act of
1933, as amended.
The various counts of the indictment in substance
charged that appellants Nemec and Dawson devised
a scheme to defraud investors and to obtain money
and property from investors by false and fraudulent
pretenses, representations and promises. The scheme
was a continuing one covering a period from ap-
proximately ^January 1, 1945 to the date of the in-
dictment. In carrying out the scheme, the appellants
formed various partnerships and carried out numer-
ous successive promotions from which approximately
$180,000 of investors' funds were obtained.
In the first phase of the scheme, appellant Nemec,
who will hereinafter be referred to as "Nemec", ob-
tained from appellant Dawson, hereinafter referred
to as "Dawson", information relating to certain min-
ing property in the vicinity of Sierra City, Sierra
Ck)unty, California. (Tr. 1373) In early 1945 Nemec
formed a Washington partnership with his wdfe un-
der the name of the Northwest Mining and Engineer-
ing Company, hereinafter referred to as "Company",
with offices in Seattle, Washington. By personal con-
tacts, as well as by sales brochures and through sales-
men, Nemec represented to investors that the Com-
pany had obtained control of a valuable placer prop-
erty at Sierra City, California and had determined
that extensive areas of Government land in the vici-
nity of this property was open for location of placer
mining claims. Investors were solicited to employ the
company to locate 20-acre placer mining claims in
this area, for a "fee" of $280 each, to be grouped
together into 160-acre "association" placer claims,
and were assured that when a large area of such
claims had been blocked up, the claims would be
leased by the Company who would then engage in
a large scale hydraulic mining operation on the
property which it controlled and on which claims had
been located. Claim holders would be paid on a pro-
rata basis from the funds set aside from the smelter
returns. It was represented that the claims were
being offered to Washington residents in order that
local California people might not become aware of
the Company's plan which possibly might precipitate
a gold rush.
Shortly after the sale of placer claims was under
way, it was claimed that valuable lode veins had
been located in the area and many of the old, as
well as the new, investors were induced to become
lode claim holders for a fee of $480 per claim. Lode
claim holders were to participate both in the returns
from the placer operations and in the lode operations.
Coincident with the sale of placer and lode claims
at Sierra City, Nemec organized the Sierra City
Mining Company, a limited partnership, purportedly
to carry on the operations at Sierra City. These
10
partnership interests were offered at the rate of
$1200 for a 1% interest in the earnings after pay-
ment of expenses. Partners were promised repayment
of their investment from the first earnings of the
operation. Although this was to be the working and
operating company of the Sierra City enterprise, the
books of account of Northwest Mining and Engineer-
ing Company disclosed no transfer of assets to the
Sierra City Mining Company.
In all, approximately $85,000 was obtained from
investors in Sierra City placer and lode claims and
partnership interests in the Sierra City Mining Com-
pany. (Tr. 1589) While Nemec was active in the
raising of funds, Dawson received an expense ac-
count and in accordance with his agreement with
Nemec, was to share in the ultimate profits. (Tr.
1420)
The majority of the placer and lode claims were
actually located upon lands already owned by others
under patents or upon land withdrawn from entry
and location and it was shown that Nemec had been
so advised by both the County Engineer, Taylor, and
the Forest Ranger, Delaney. The lode claims were
so improperly described that they could not be lo-
cated or platted. (Tr. 64)
While the Sierra City operations were still being
carried on with false pretenses of early dividends,
Nemec and Dawson commenced examining additional
property in Butte County, California upon which a
similar plan of locating placer claims might be follow-
ed. Dawson admitted calling this to Nemec's atten-
11
tion. (Tr. 1423) A campaign was then commenced
for the sale of placer mining claims at a "fee" of
$385. per 20-acre claim in the area commonly re-
ferred to as the Mammoth Channel in Butte County,
California. This Mammoth Channel was an ancient
river channel covered by a deep lava overcapping. In
the sales brochure prepared by Nemec, (PI. Ex. 55, p.
2176) it was represented that forty 160-acre associa-
tion placer claims could be located in the area of this
channel and operated as a single unit using a plan
of underground sluicing through a tunnel under the
ancient river channel commencing at a place where
Big Butte Creek had cut through the lava overcap-
ping to expose the ancient channel. Maps in cross-
section and geographic detail (PI. Ex. 5) were used
by Nemec to present the plan to investors. The tunnel
site, necessary for the mining operation as portrayed
by Nemec, was claimed to have been acquired by the
Company and located on property known as the
California Treasure Box, or on property of the
Pacific Gas and Electric Company. This fact was
denied by the owners of these properties. As shown
by the official records and depicted on the map pre-
pared therefrom (PI. Ex 6), no other land in the
area where Big Butte Creek intersects the Mammoth
Channel was open for the location of mining claims
or for tunnel site purposes. Claims were to be lo-
cated in a continuous area over the course of the
Mammoth Channel as shown on the map exhibited
to investors by Nemec.
As in the case of Sierra City claims, many of the
Mammoth Channel claims were located upon patented
12
land and on lands not open to mineral entry because
of withdrawal for power site purposes or prior loca-
tions. The claims as located were scattered over a
thirteen mile area making impossible a continuous
unified operation as represented by Nemec. (PI. Ex. 6,
Tr. 104-106) When it became apparent to Nemec
and Dawson that claim holders had learned of the
invalidity of the claims located for them in this area,
Dawson relocated nearly all the claims. Even the re-
locations, however, were widely scattered and not
susceptible to a unified operation and were again
chiefly located on power withdrawn lands. (PI. Ex. 6,
Tr. 103-104)
Approximately $40,000 was obtained from invest-
ors in the Mammoth Channel promotion and no min-
ing operations of any kind were ever commenced
although investors were assured from time to time
that operations were about to commence. It is ap-
parent from the invalidity of the claims themselves
in addition to their being scattered over a thirteen
mile area, that no mining operation could be com-
menced in this area.
While the sale of claims in Mammoth Channel was
still under way, representations were being made by
Nemec to investors and prospective investors that
an eminent atomic scientist of the Hanford Atomic
Energy project, Dr. Harold R. Rector, had become
associated with the Company. (Tr. 636) It was rep-
resented that Dr. Rector was to head a project for
the recovery of gold from black sands at Crescent
City by the use of an atomic process which he had
13
developed. Dawson, Nemec and Rector assisted in
obtaining newspaper publicity relating to Rector's
achievements and reprints of this article were circu-
lated by Nemec to investors. (Tr. 819) Nemec also
had Rector give lectures on the atomic theory to
prospective investors coming to Crescent City. (Tr.
960-966) To provide a vehicle for this phase of the
scheme, a new partnership v/as formed known as the
Crescent City Mining Company in which interests
were offered to investors at the rate of $1200 for
a 1 % interest, and approximately $60,000 was raised
by the sale of these interests. No returns of any kind
were paid to investors.
The Government presented substantial evidence
that the nineteen specific misrepresentations set forth
in the indictment were made to investors by Nemec
either in person, through sales literature or through
salesmen instructed by Nemec. Substantial evidence
was presented proving the falsity of these misrepre-
sentations. Since it would unduly extend this state-
ment to detail the evidence introduced by the Govern-
ment relating to all of the nineteen misrepresentations,
only the most important of those misrepresentations
and the evidence refuting same will be referred to.
The essence of the plan by which investors were
induced to enter contracts for Sierra City placer
claims. Sierra City lode claims, and Mammoth Chan-
nel placer claims was the representation that lands
in each of these areas were open for the location of
the claims. (Tr. 246, 2154, 2176) It was represented
that the claims could be patented if desired by the
claim holder. (Tr. 143, 180) Ross F. Taylor, a civil
14
engineer and former County Assessor, testified in
refutation of the above report that from his examina-
tion of the Sierra County records and Government
records, only five of the approximately fifteen as-
sociation placer claims at Sierra City were not lo-
cated fully or partially upon patented, previously
located land or on power withdrawn areas not open
for location. (Tr. 73-78) Similar testimony by Taylor
was given relating to lode claims.
In the case of the Mammoth Channel claims in
Butte County, the testimony of Martin L. Polk, civil
engineer and County Assessor, disclosed that the
majority of the thirteen original association claims
were located either on land already patented or with-
drawn for power site purposes and therefore invalid.
Mr. Polk further testified that of the ten relocations
of said association placer claims made by Nemec and
Dawson, these relocations were almost entirely upon
lands withdrawn from mineral entry or for power
withdrawal purposes and therefore again invalid.
(Tr. 98-106)
As a background for the original offering of min-
ing claims in the vicinity of Sierra City and as ex-
planation for the reason that investors were being
solicited to locate placer claims, it was represented
by Nemec that no person could file on more than
one 20-acre placer claim (Tr. 177-178) and for this
reason it was necessary to obtain a large number
of investors in order to block up a large area for
hydraulic operations. The falsity of this representa-
tion is apparent. As correctly instructed by the Court,
15
no such limitation exists in law, the only limitation
being that no person may hold more than one 20-acre
placer claim in an association of eight claims.
Sierra City lode and placer claim investors were
assured by Nemec that regardless of the outcome of
the mining operations, their investments were risk
free because sufficient profits could be obtained from
the removal of the timber upon claims to repay the
amount of the investment. (Tr. 207-208) In addition
to the fact that many of the claims were invalid be-
cause located on lands not open for mineral entry
and consequently timber therefrom could not legally
be removed, the Government further refuted this rep-
resentation through the testimony of Frank B. De~
laney, U. S. Forest Ranger in charge of the Sierra
City area. Mr. Delaney testified that he was thor-
oughly acquainted with the claims at Sierra City and
the timber thereon and that there was no merchant-
able timber on any of the claims. (Tr. 409-421.) It
was further represented to investors of the Sierra
City operation that an option on the Sierra Butte
mine had been obtained by Nemec and Dawson on
behalf of the Company and that earnings from its
operation would inure to the benefit of claim holders.
(Tr. 147, 181, 209.) Clarke, one of Neme's salesmen
and a defendant in the conspiracy, admitted when im-
peached by previous testimony given under oath
before a Government investigator, that he had made
such representations and that Nemec had furnished
him the information. (Tr. 1257-1258) To prove the
16
falsity of such representations, the Government pro-
duced as its witness one Elistus L. Hayes whose family
has owned the Sierra Butte mine for the past forty
years and who testified that although approached by
Dawson with reference to an option and a lease on that
property, he unequivocally refused then or at any sub-
sequent time to give Dawson or Nemec or the Com-
pany any lease, option or right to purchase or operate
the mine. (Tr. 451)
It was represented to investors that the claims
located along Mammoth Channel in Butte County,
California would be operated in a single unified
underground placer mining operation and it was fur-
ther represented that approximately 5400 acres of land
had been determined to be available for the location
of claims in this area. (Tr. 567-568) The advantages
of working the large block of claims in a unified
operation were dealt with in considerable detail. As
has already been pointed out hereinbefore in our
Statement of the Case, the falsity of this representa-
tion is apparent from plaintiff's exhibit "6" which
shows all of the association placer claims actually
placed by Nemec and Dawson on the Mammoth Chan-
nel to be scattered over a thirteen mile area making
a single unified operation impossible.
It was further represented that a tunnel site in
the area of Mammoth Channel had been acquired
at the intersection of Big Butte Creek with the claim-
ed course of the Mammoth Channel and this tunnel
site was pointed out to investors on the sales map
of the Mammoth Channel area used by Nemec and
17
his salesmen. (PI. Ex. 79) In this connection some
investors were told that the tunnel site was on
property known as the California Treasure Box and
the Company had control of that property. (Tr. 488)
Other investors were told that the tunnel site was
on the property of the Pacific Gas and Electric Com-
pany and that a lease had been secured with the
Pacific Gas and Electric Company for tunnel rights
on said property. (Tr. 321, 534-535) To prove the
falsity of these representations, the Government call-
ed as its witness one Marcel Schmidt v/ho testified
that he has been the owner of the California Treasure
Box since February of 1945 and that at no time did
he execute a lease or option of the tunnel site on
said property or any purchase of said property to
either of the appellants here or to the Northwest
Mining and Engineering Company. (Tr. 807-808)
Mr. Cullen W. Coates, a representative of the Pacific
Gas and Electric Company and called by the Govern-
ment as its witness, testified unequivocally that his
company had made no lease or given any commitment
on its property in the Mammoth Channel area to
either of the appellants here or to the Northwest
Mining and Engineering Company. (Tr. 692-695)
The crux of operations in Mammoth Channel, as ex-
plained by Nemec to investors, was based upon pos-
session of a tunnel site at Big Butte Creek. Without
the possession of that site the operation outlined by
Nemec was impossible.
It was represented to investors and prospective in-
vestors that Nemec and the Company had obtained
the services of an eminent nuclear physicist, Dr.
18
Harold R. Rector, and that Dr. Rector had
demonstrated a secret process by which gold could
be obtained from black sands through the use
of atomic processes. (PI. Ex. 149, Tr. 636) The
Rector process was to be used in operations at Cres-
cent City. In proof of the falsity of this misrepresen-
tation, Dr. Rector himself took the stand and ad-
mitted that he had no background as an atomic scient-
ist or nuclear physicist but that rather, he was a
chiropractor employed at the Hanford Atomic pro-
ject as a water tester. (Tr. 838-839) Rector further
testified that he disclosed his lack of qualifications
to Nemec and to Dawson and that the latter com-
mented about his being a chiropractor. (Tr. 877)
Rector also under Nemec*s direction, gave so-called
"fireside chats'* to prospective investors coming to
Crescent City on his atomic process for gold recovery
with the sole purpose of impressing investors and
prospective investors. (Tr. 876, 960-966)
APPELLANT NEMEC'S
ASSIGNMENTS OF ERROR
The appellant Nemec's assignments of error will
be discussed in the order in which they are set forth
in the appellant's brief.
ARGUMENT
1. Answer to Appellant Nemec's Assignment
of Error No. 1, viz., That The Verdict, Insofar
as the Appellant Nemec is Concerned, is Con-
trary to Law. The Evidence is Insufficient to
Support the Conviction.
The Appellant Nemec was the President of the
Northwest Mining and Engineering Company and
19
was the principal defendant in the case. Counsel for
appellant Nemec stated that the jury was permitted
to find a verdict of guilty without the necessary
careful discriminating assessment of the guilt of
the defendants. The statement is in error as ap-
pellant Nemec's counsel at the time of trial were
satisfied v/ith the instructions and failed to except
thereto. (Tr. 1944) This appellant cites the case of
Kotteakos v. United States, 328 U. S. 750 as author-
ity for the claim that this case was tried upon wrong
theory. In the Kotteakos case there v/ere several con-
spiracies consisting of independent groups unknown
to the other, and in this case there was one closely
knit group all working together for one common
object, to-wit: the swindling of the public by sale
of mining claims, mining leases, partnerships and
interests in atomic processes — anything to take in
the money for one common objective, the enrichment
of the appellant F. E. Nemec, the chief partner in
the Northwest Mining and Engineering Company.
Nineteen different misrepresentations are charged
to the appellant Nemec and his co-conspirators. Ap-
pellant's counsel now seeks to go over more than a
thousand pages of the record with a high powered
magnifying glass and point to certain specific in-
stances where he thinks certain of the misrepresenta-
tions have fallen by citing some particular answer
of a particular witness to a particular question. The
whole matter of these alleged misrepresentations was
submitted to the jury by careful and appropriate
instructions which satisfied the appellant at the time
they were given.
20
The evidence, when considered as a whole, is con-
clusive as to the fraudulent nature of the misrepre-
sentations. It is submitted that this Court in review-
ing the record at this time must take the view of the
evidence which is most favorable to the Government
and accept as true all the facts which the evidence
reasonably tended to prove.
Boushea v. United States, 173 Fed. (2d) 131.
II. Answer to Appellant Nemec's Assignment
of Error No. 2, viz., That the Court Erred in the
Admission of Exhibit 211, it Being Highly Pre-
judicial to the Appellant Nemec on the Theory
on Which the Case was being Tried.
Exhibit 211 is a desist and restraining order re-
straining the appellant Nemec from selling securities
in the State of California. Appellant Nemec testified
elaborately as to his employment and life from the
year 1907 including the service of a term in the peni-
tentiary for a violation of the Securities Act and sub-
sequent operations in California and Arizona. (Tr.
1486-1500) He carefully omitted the part about a
restraining order being entered against him in the
State of California. Cross examination as to the Cali-
fornia restraining order merely filled in a gap in the
picture of a life history which he gave to the jury.
Also, all claims sold to investors were sold to resi-
dents of the State of Washington. Appellant Nemec
and his salesmen told many of the Washington in-
vestors that the reason that these claims were not
sold in the State of California where they were lo-
cated was that if the fact ever became known to
21
residents in California that the claims were being
located there, another California gold rush would be
precipitated and the natives in California who were
near the scene would have an opportunity of seizing
the ground and eliminating outsiders, including the
prospective investors in the State of Washington,
from being able to get any of the claims. An example
of these statements comes out in the testimony of
the investor witness Smiley (Tr. 142) and the in-
vestor witness Dawes (Tr. 178).
In view of the reason assigned by the appellant
for making his claims available to Washington in-
vestors — a logical one as far as the investors were
concerned as they believed that they were being be-
friended by the appellant by being permitted to make
this investment — the Government in all fairness
should be permitted to show another reason why the
appellant Nemec was not offering claims in the
State of California — because there was a restraining
order against him preventing him from so doing.
In view of the evidence it was only equitable and
just to submit both these reasons to the jury so that
the jury could say which one was more likely to be
true — ^whether or not the appellant was imbued with
the philanthropic spirit of aiding Washington in-
vestors or whether the California restraining order
may have been a motivating force in keeping him
from selling his claims in that state.
III. Answer to Appellant Nemec*s Assignment
of Error No, S, viz., That the Court Left a Mat-
ter of Law to the Discretion of the Jury in Allow-
22
ing Them to Rule as to Whether \ot Not the Part-
nership Agreements were Within the Scope of
the Securities and Exchange Commission Act.
This assignment of error is argued elsewhere in
this brief at page 38 and will not be again argued
here.
IV. Answer to Appellant Nemec's Assignment
of Error No. ^, viz., That the Court Erred in In-
structions Given.
As previously explained, no exceptions were taken
by appellant Nemec's counsel at the time the Court
instructed the jury as to the erroneousness of any
of the instructions. In view of that fact, this Court
should not at this time consider error in the instruc-
tions unless it is of such grevious nature that the
Court of its own volition should notice it. Counsel
does not so contend.
V. Answer to Appellant Nemec^s Assignment
of Error No. 5, viz., That Letters from, the De-
fendants Were Admitted Which Were Entirely
Outside the Scope of the Indictment Since They
Were Either Written in many Instances Long
After the Money had Parsed to the Defendants,
and thus luere not Under any Conceivable Theory
Part of the Inducement for which the Money was
Passed or vjere Written After the Finding of
the Indictment.
As has previously been argued in this brief, the
enterprises of the Northwest Mining and Engineer-
ing Company were continuing from early in the year
1945 down to the return of the indictment in May,
1948. The appellant intended to reload the investors
in other enterprises so that the fraud was continu-
23
ing, the thought in view being to reload each in-
vestor as many times as possible in order to obtain
as much as the traffic would bear.
These letters which counsel refers to would also
be admissible as lulling letters as they were used to
communicate with the investors and lull them into
a sense of security when the Northwest Mining and
Engineering Company had no intent or prospects of
ever paying out or performing in accordance with
those letters.
Brady v. United States, (CCA9) 26 Fed. (2d)
400 Cert. Den. 278 U. S. 621.
Certain letters were admitted after the return
of the indictment which were written by the appellant
Dawson. These letters were admitted without objec-
tion by appellant Dawson's counsel and were admit-
ted under cautionary instruction of the Court to
regard them only against Dawson. (Tr. 1458-1459)
VI. Answer to Appellant Neme&s Assignment
of Error No. 6, viz., That the Court Erred in Re-
fusing to Permit the Admission of Exhibit 150
(Tr. 801 and 802) Thereby Depriving the Ap-
pellant Nemec of the Oportunity to Prove who
Wrote the Article of October 11, Concerning the
Qualifications of Dr. Rector.
Exhibit 150 referred to a page in the Del Norte
Triplicate containing an article written by someone
connected with the newspaper condemning the Se-
curities and Exchange Commission for certain prac-
tices of inconsiderate dealings with mining promo-
tions and lack of enthusiasm for new methods. (Tr.
824) This was the same paper which published laudi-
24
tory articles of Dr. Harold R. Rector as an eminent
scientist, nuclear physicist, and atomic scientist. No
showing of materiality to any of the issues in this
case can be made about the newspaper article written
by some anonymous author condemning the activities
of the Securities and Exchange Commission. Even
if the Securities and Exchange Commission was
guilty of all the vices and inequities charged, such
would not detract from the guilt or innocence of the
appellants.
VII. Answer to Appellant Nemec^s Assign-
ment of Error No. 7, viz,, That a co-defendent
was Pleaded Guilty Before the Jury Panel and
Then Permitted to Change his Testimony Before
the Very Jury Chosen from that Panel. Proper
Safeguarding Instructions were not Given by
the Lower Court.
The answer to this argument is set forth fully in
this brief, page 34, and will not again be discussed
here with the exception that it is submitted that the
Court did give proper cautionary instructions in his
charge to the jury as to the guilt or innocence of
Dr. Rector having an effect on the guilt or inno-
cence of other co-defendants. The Court in his charge
to the jury adequately protected the other defendants
by the following language:
"The fact that the defendant Harold R. Rector,
in your presence, pleaded guilty to the charge
of conspiracy shall be disregarded by you in
determining the innocence or guilt of all the re-
maining defendants, for under the terms of the
indictment the said defendant Rector is charged
with having conspired with some person or per-
sons not known or named in the indictment, other
25
than and as well as the other defendants, and
this he may have done without any involvement
of the remaining, named defendants." (Tr. 1929)
It is submitted that this instruction protected the
remaining defendants as far as it was humanly pos-
sible to do so by any instruction. Counsel assigned as
error the giving of an instruction that the witness
Harold R. Rector is what is known as an accomplice
and that such operates against the credibility of his
testimony. (Tr. 1935) This instruction was in favor
of the appellants because the jury was told that Rec-
tor was an accomplice and that his testimony should
be scrutinized with great care.
In any event it may be stated that no exceptions
were taken to any of these instructions at the time
given and as were required by law and rule of this
court. Counsel for appellant Nemec complained that
Dr. Rector was guilty of perjury and was not in-
dicted but placed upon probation and assessed no
fine. Argument made that Dr. Rector is guilty of
perjury and was not sufficiently punished is extrane-
ous to any of the issues in this case and will not be
discussed.
VIII. Answer to Appellant Nemec*s Assign-
ment of Error No. 8, viz., That the Court Erred
in Permitting Inflamatory Remarks by the
United States Attorney in his Argument to the
Jury which Remarks had Nothing to do with the
Evidence which had been Adduced at the Trial.
It is now charged for the first time that certain
inflamatory statements were made by the United
States Attorney in the opening statement and in the
26
final argument. Certain excerpts from the argu-
ment are now quoted and are claimed to be erroneous.
No exception was taken at the time these arguments
were made by the appellant's learned counsel. The
Court gave the usual and cautionary instruction that
arguments of counsel are not evidence and not to be
considered as evidence and are to be regarded by
the jury only insofar as they agree with the jury's
recollection of what the evidence was.
This case was long and lasted about three weeks.
Testimony was voluminous. The defendants had five
counsel part of the time and four during all of the
trial. The case was tried in a vigorous manner and
at times language was used on both sides that pos-
sibly was not the most courteous that could have
been used. In view of the intricate issues involved and
the length of the evidence, the arguments on both sides
were surprisingly free from use of abusive and bellig-
erent language and I believe there was only one or
two objections in nearly a day and one-half of final
argument.
Counsel for appellant Nemec in his final argument
far exceeded the bounds of propriety and called for
a vigorous answer. He stated as follows:
"I'm one of the men of Crescent City. My
father was one also. If I felt, if I knew I'd been
defrauded, I'd never be standing here now; I
would have been in that witness chair talking as
fast as the next witness." (Tr. 1859-1860)
Here counsel for the appellant Nemec stated to
the jury that he and his father were investors in
27
Crescent City. He was arguing the case to the jury
as well as testifying. Although the Government took
no exception to this argument, Government counsel
were entitled to reply to it in a vigorous and forth-
right manner and to comment upon the chain of
evidence showing the fraud in strong vigorous terms
and would be derelict in their duty for failure to
do so.
APPELLANT DAWSON'S
ASSIGNMENTS OF ERROR
The appellant Dawson's assignments of error will
be discussed in the order in which they are set forth
in the appellant's brief.
ARGUMENT
• I. Aiiswer to Appellant Dawson^s Assignment
of Error No. 1, viz.. That the Verdicts are Con-
trail^ to the Law and the Evidence. The Evidence
is Insufficient to Support the Verdicts.
The trial judge, in summing up the evidence as
to Dawson on the Motion to Dismiss, summed up the
case as follows:
''Mr. Redmond testified he met Mr. Dawson
in September, 1945, and that's been gone into,
as to what was done as to the employment of
Mr. Redmond as an engineer for the Northwest
Mining and Engineering Company. My notes
show that Mr. Daw^son told Mr. Redmond that he
was an associate of Mr. Nemec in mining opera-
tions at Sierra City. Mr. Schnell saw Mr. Daw-
son and Mr. Nemec in 1946 and talked with them
regarding the Mammoth Channel. He met them
in a hotel in Chico, California. Mr. Smith met
28
Mr. Dawson near the operations of this North-
west Mining and Engineering Company in the
spring of 1946 near Magelia, and Mr. Dawson
asked about leasing the Genii Mine. Mr. Nemec
was with Mr. Dawson at that time, and Mr.
Dawson at that time told Mr. Smith that they
were locating claims in the county, that they
had located a group — no, that they were backed
by a group of investors from Hanf ord. Mr. Daw-
son again talked with Smith in California in De-
cember, 1946 about the Genii Mine, and offered
Mr. Smith at that time a job and a salary and
an automobile if he v/ould lease the mine and
let Mr. Dawson have it. Of course, there isn't
any evidence, as I understand it, definite evidence
that he was leasing the mine for the Northwest
Mining and Engineering Company, but the only
association it is shown from the evidence that
Mr. Dawson had, or the only reason he had to
be in this particular area of California over a
long period of time, was in some connection v/ith
Mr. Nemec's enterprise. There isn't any other
evidence from which any other inference could
be drawn.
*'Mr. Helton saw Mr. Dawson, Rector and Ne-
mec in California. Dav/son told Helton he was a
mining scout; he told him his company had join-
ed forces with Dr. Rector, v/ho was using his new
knowledge gained at Hanford on the extracting
of gold; then the newspaper article which Mr.
Helton wrote, v/hich he read back to Mr. Nemec,
Rector and Dawson; and then of course there is
Dr. Rector's testimony v/hich has been gone into
in considerable detail, and indicates that Mr.
Dawson knowingly at least to some substiantial
extent entered into what Mr. Rector testified ^;^^as
a scheme or a plan to make it falsely appear that
Dr. Rector was an atomic scientist and a nu-
clear physicist, and had been in an important
position in connection with the government pro-
ject at Hanford. Of course, reference has been
29
made to Dr. Rector's testimony, that he remark-
ed to Mr. Dawson that he was fearful that it
might become known that he was only a chiro-
practor, and Mr. Dawson replied Tes, that
wouldn't do at all' and according to my notes
Dr. Rector testified that at one time when he
was acting as superintendent of the operations
of the Northwest Mining and Engineering Com-
pany, that he, Dawson, and Nemec were all
drawing checks on the bank account of the
Northwest Mining and Engineering Company.
"That certainly would indicate that Mr. Daw-
son had a very direct connection with the opera-
tions of the Northwest Mining and Engineering
Company, and then I won't refer in detail to
the other evidence of Dr. Rector, and I am still
of the view that where a witness's testimony may
be weakened by contradictions or indications that
at some time during his testimony he wasn't tell-
ing the truth, or where he changes his testimony
from cross to redirect, that that matter is a matter
of weighing or of judging the weight that should
be given to the testimony, and that's for the trier
of the facts, which is the jury in this case.
'Then Mr. Fegan, the Securities and Exchange
attorney, testified that he had interviewed Mr.
Dawson, and that Dawson said he had known
Mr. Nemec for 25 years, and was working with
him to set up this mining enterprise. Mr. Daw-
son wasn't of course definite; he said that he
wasn't a partner, that he wasn't an officer of
the company, but I have this note, that he said
that he was associated with Frank Nemec, and
that they would cut the pie when they had — at
some stage of their proceedings, at any rate,
would cut the pie. Now, from that I think there's
ample evidence there to warrant submission of
the case to the jury as to Mr. Dawson being a
member of this conspiracy; and as to the other
counts of the information, or rather the indict-
ment, it has been held that a scheme devised to
30
use the mails to defraud is a conspiracy in ef-
fect, whether or not a conspiracy is specifically
charged, and that the same rules of evidence
apply, so that if one is a member of and par-
ticipates in a scheme, and one of the members of
that, a party to the scheme, does make a mailing,
I might say this, that it must be a scheme that
reasonably is of such a character that use of
the mails will be required, and the mails are
used by one who is in the scheme, that the others
are bound by it, and I think it seems to me that
it would be impossible to make a distinction here,
that Mr. Dawson would either have to be con-
sidered a member of the conspiracy, I'm talking
now of substantial evidence, if I leave him in
the conspiracy I must leave him in the substan-
tive counts, or he must be left out of all
of them. I don't think there could be any dis-
tinction drawn between the first count and the
later substantive counts." (Tr. 1154-1158)
Dawson did not make any sales. He was not em-
ployed by the Company for that purpose, but was
engaged as a mining scout and a local manager who
was to run the affairs of the Company locally. After
the trial judge held there was enough evidence to
hold Dawson as a defendant, the following additional
evidence, submitted by the defendants, strengthened
the case against Dawson by his acting participation:
Frederick H. Vahrenkamp testified he was en-
gaged by Mr. Dawson as an engineer for the North-
west Mining and Engineering Company at Sierra
City. (Tr. 1185) Dawson then proceeded to take the
mining engineer, Vahrenkamp, to the operations at
Sierra City, where they met the appellant Nemec.
(Tr. 1185)
31
Dawson himself stated as follows in his own testi-
mony:
"Q. Well, how were you to *cut the pie' with
Mr. Nemec, then?
A. Well, that phraseology of cutting the pie, it
was mentioned I believe to an S. E. C. by the
name of Newton in Los Angeles, if, as and when
there's a profit, then if Nemec was to cut the
pie, then if that phraseology fits it, why, I was
willing to take whatever slice that he was willing
to give me." (Tr. 1422)
Dawson later talked with Nemec about the Mam-
moth Channel properties and agreed to locate claims
there for Nemec. (Tr. 1424-1425)
Dawson also admitted that he had told Nemec that
he tried to make a deal with Elistes Hayes for the
Sierra Butte Mine and failed. (Tr. 1450) He also
tried to make a deal with High Pockets Smith for
the Genii Mine, but failed. (Tr. 1451) He drew
checks on the Northwest Mining and Engineering
Company. (Tr. 1452) The evidence, as admitted by
appellant Dawson in his brief, does show Dawson's
connection with the Northwest Mining and Engineer-
ing Company as a field representative, a man em-
powered to represent the Company in obtaining prop-
erties, leases, commitments, and even the power to
write checks upon the company, although he did not
go out in the field and make any sales of any claims
or investment shares to any prospective purchaser.
In any conspiracy case not all participants are sales-
men, or managers, nor is it necessary that the ap-
pellant make a sale or be connected with all phases
32
of the work in order to hold him as a party to the
fraudulent enterprise. If he participated, knowing
of the fraud, aided and assisted in any way, he
would be guilty. In this case, there was ample evidence
to show that Dawson was an active principal through-
out the fraudulent enterprise from the beginning at
Sierra City, down to the returning of the indictment
and that he was to "cut the pie" with the president
of the Northwest Mining and Engineering Company,
F. E. Nemec.
II. Answer to Appellant Dawson*s Assignment
of Error No. 2, viz., That the Court Erred in
Permitting Evidence to he Received on the
Theory of a Conspiracy on Both the Charges for
Violation of the Securities & Exchange Act and
of the Mail Fraud Statute. There was no Evi-
dence Whatsoever to Support a Conviction on the
Charge for Violation of Mail Fraud on the Part
of the Appellant Dawson, and the Verdict Re-
turned was on the Conspiracy Charge. Hence it
Cannot be Told on What Basis the Jury Returned
its Verdict.*'
The appellant Dawson lays considerable stress on
the case of Krulewitch v. United States, 336 U. S.
440. The appellee has no quarrel with the Krulewitch
case, which was a white slave traffic case in which
the transportation was completed when the conver-
sation as to the conspiracy took place. In the Krule-
witch case the conspiracy had terminated and was
no longer in existence as the offense had consisted of
one transportation for immoral purposes. In this
case the fraud was continuing down to the date of
trial and the appellants were shifting from one min-
33
ing and manufacturing enterprise to another in order
to garner every available dollar possible from the in-
vestors. This was a long trial lasting three weeks,
the record comprising 2,679 pages and consisting of
215 exhibits. In this case the Government was com-
pelled to build the case piece by piece. In other words,
in the early stages of the trial certain exhibits, such
as plaintiff's exhibits 49 and 63, were admissible as
against one defendant and could not be connected
up until later in the case.
As the trial judge pointed out, the Government
was entitled to latitude, as it could not ask its ques-
tions of all of the different witnesses at once so as
to make all evidence admissible against evei'y con-
spirator at one time. It must proceed to build its
case bit by bit and the defendants had an ample op-
portunity^ at the time the Government concluded its
case to move for judgment of acquittal and did so.
By that time the Government had made a prima facie
case against appellants and the exhibits were then
well connected. This procedure was approved by this
court in the case of Blumenthal v. United States,
(CCA 9) 158 Fed. (2d) 883, at page 891, also in
the case of Rose v. United States (CCA 9) 149 Fed.
(2d) 755. This court held the statements made by
one conspirator during the conspiracy to further the
objects of the conspiracy are binding on all conspir-
ators.
The charge of conspiracy to violate the Securities
Act and mail fraud statute in single count is per-
missible since the conspiracy is the gist of the of-
34
fense. Braverman v. United States, 317 U. S. 49, Nye
& Nissen v. U. S. (CCA 9) 168 Fed. (2d) 846.
in. Answer to Appellant Dawson*s Assigii-
ment of Error No. 3, viz.,^ That the Court Erred
in the Admission of Plaintiffs Exhibit 211 as
Being Highly Prejudicial to the Appellant Daw-
son on the Theory on Which the Case was Tried.
Since a similar assignment of error is made as to
the appellant Nemec, this assignment of error is dis-
cussed more adequately in the brief commencing at
page 20. Plaintiff's Exhibit 211, which was
a restraining order by the State of California pro-
hibiting the appellant Nemec from selling securities
in the State of California, was admitted as against
appellant Nemec. It is believed that such exhibit could
not be prejudicial to the appellant Dawson as he is
not a party in any way to it.
IV. Answer to Appellant Dawson^s Assign-
ment of Error No. 4-, viz., That The Court Erred
in Permitting Doctor Rector to Plead Guilty in
the Presence of the Jury and then to Testify
Against the Appellants in the Presence of the
Jury.
In the first place the record does not indicate that
Dr. Rector did plead guilty in the presence of the
jury. He pleaded guilty before a jury was impaneled
to try the case. There were members of the jury
panel present in court at the time, but the record
does not so indicate. The matter of Dr. Rector's
change of plea came as follows:
''MR. ETTER: At this time, your Honor, the
defendant Rector waives the reading of the in-
35
dictment, desires to withdraw the plea hereto-
fore entered in the other cause, I think 4166, and
enter a plea of guilty to count one of the new
indictment.
THE COURT: Where is Dr. Harold Rector?
MR. ETTER: Right here.
THE COURT : Mr. Erickson, do you have some-
thing to say to that? I assume you wouldn't
object to that.
MR. ERICKSON: No, I woldn't object if I
could, and I have no objection to it.
THE COURT: Your name is Dr. Harold R.
Rector?
DEFENDANT RECTOR: Yes, sir.
THE COURT: You understand the nature of
the charge here?
DEFENDANT RECTOR: Yes, sir.
THE COURT: And have been fully advised as
to your rights ; it is your desire to withdraw your
plea of not guilty to the former indictment in
this case?
DEFENDANT RECTOR: I'm sorry—
THE COURT: I say, do you wish to withdraw
the plea that you have heretofore entered of not
guilty in the case?
DEFENDANT RECTOR: Yes.
THE COURT: All right; what say you now to
count one of the indictment in this case, Dr.
Rector?
DEFENDANT RECTOR: I wish to plead guilty.
THE COURT: All right, let the record show
that Dr. Harold R. Rector has entered a plea of
guilty in this case." (Tr. 24-26)
36
Objections were then made by Mr. Ulvestad, attor-
ney for appellant Nemec, and Mr. Edgerton, attorney
for appellant Dawson, that the procedure was in the
presence of the jury. However, the jury had not yet
been impaneled to try the case. They were impaneled
later. (Tr. 27)
When counsel for Dr. Harold R. Rector approached
the Court to ask permission to plead guilty, neither
the Court nor other counsel had an idea of what he
was going to do. The United States Attorney had a
premonition that he might move to change his plea,
but no assurance. In any event, it would be impossi-
ble to conceal the fact from the jury that Dr. Rector
had changed his plea because even before the jury
was impaneled and advised not to read anything in
the newspapers, the newspapers had gone out with
the story that Rector had entered a plea of guilty.
He was mentioned in the indictment, which was a
proper exhibit for the jurors to take to the jury
room, and they could see his name in it. He was
called as a witness on behalf of the Government —
he testified in court against the co-defendants. The
jurors at that stage of the proceedings certainly
would know that he entered a plea of guilty as he was
named in the indictment as a co-defendant. The fact
that Dr. Rector entered a plea of guilty could not
have been concealed from the jury with trials con-
ducted openly and in public as they are under the
American system of justice. This practice has been
sanctioned in the case of Grunberg v. United States,
(CCA 1) 145 Fed. 81, at p. 86.
37
V. Answer to Appellant Daivson's Assignment of
Error No. 5, viz., That the Defendants were Prej-
udiced in Having a Fair Trial Guaranteed by the
Fifth Amendment to the Constitution of the
United States, in that Doctor Rector was an Ad-
mitted Perjurer and was Placed on the Witness
Stand by the Government to tell one Story and
then to Change his Testimony in the Very
Presence of the Jury.
Certainly this assignment of error cannot be con-
sidered seriously. Appellant cites no cases to sustain
his position. It is submitted that a single witness
often gives contradictory testimony, that the weight
of his testimony is for the trier of the fact, which is
the jury. The fact is that his testimony changed
during the time he was on the stand and was seized
upon by the appellant Dawson's counsel and argued
vigorously to the jury that they should disbelieve
everything that he said. The court protected the ap-
pellant's rights thoroughly when the jurors were in-
structed that where a witness wilfully testified falsely
as to any material matter of fact, the jury is at
liberty to disregard that witness' testimony unless
corroborated by other credible testimony. Appellant's
argument goes to the weight of Rector's testimony
rather than its admissibility. The Court gave the
proper cautionary instruction. (Tr. 1918).
VI. Anstuer to Appellant Dawson's Assign-
ment of Error No. 6, viz., That the Court Erred
in Instructions Given.
Appellant's counsel at the time of the trial were
satisfied with the instructions, as the trial court gave
the instructions they asked for. No exception was
88
taken to the Court's instructions. (Tr. 1944) There-
fore the instructions must be clearly erroneous and
amount to a denial of due process of law to be con-
sidered now. No argument is made that they are
such.
VII. Answer to Appellant Dawson^s Assign-
ment of Error No. 7, viz., That the Court Erred
in Instructing the Jury to Find as a Matter of
Fact Whether the Partnership Agreements as
Entered into Between the Appellants and the
Alleged Victims were Within the Scope of the
Securities <& Exchange Act.
In Title 15, Sec. 77 (b), Definitions, a security is
defined as follows:
"(1) The term 'security* means any note,
stock, treasury stock, bond, debenture, evidence
of indebtedness, certificate of interest or partici-
pation in any profit-sharing agreement, collat-
eral-trust certificate, pre-organization certificate
or subscription, transferable share, investment
. contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided inter-
est in oil, gas, or other mineral rights, or, in
general, any interest or instrument commonly
known as a 'security,' or any certificate of in-
terest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or war-
rant or right to subscribe to or purchase, any of
the foregoing."
The appellant Dawson assigns as error that the
court failed to instruct the jury as to whether or
not the partnership agreements were securities within
the meaning of the Act. Certainly the appellant can-
not assign as error the failure of the court to instruct
that these partnership agreements are securities. The
39
court defined what a security was and told the jury
that it was for them to determine whether the inter-
ests offered were securities. It is submitted that
there is ample evidence to support the jury's finding
that the purchase contracts were securities, because
they guaranteed each claim holder a participating
interest in the net proceeds of the mining operations.
The Court was extra cautious in appellant's favor in
submitting the matter this way to the jury instead
of instructing the jury that they were securities.
Inasmuch as the securities in this case were similar
to those involved and discussed in the case of Secun-
ties & Exchange Commissioyi v. Joiner^ 320 U. S. 344,
the trial court followed the standards adopted by that
case in proving whether or not these investment con-
tracts were securities within the Act.
CONCLUSION
The ventures of these related operations of the
Northwest Mining and Engineering Company were
failures, as far as the investing public was concerned.
They obtained nothing but pieces of paper entitling
them to profits in the various enterprises, together
with vv'ritten and verbal assurances from the appel-
lant, F. E. Nemec, that the profits v/ould be available
to them in short order.
The whole enterprise, therefore, consisted of a
continuing scheme to sell to whoever was gullible
enough to purchase any interest in any subsidiary of
the Northwest Mining and Engineering Company,
be it the Sierra City placers, Sierra City lodes, Sierra
40
City Mining Company, the Mammoth Channel claims,
or the Crescent City Mining Company. Indeed, even
at the time of the trial, the appellants were engaged
in the manufacture of granium in Los Angeles, Cali-
fornia, and at that time were promising the investors
that they would soon attain success and have their
money for them. The attempt of the appellants was
to sell anyone any sort of a placer or lode claim, any
of their operating companies, or any interest in any
of their atomic processes to obtain money.
No effort was made by the Government to show
how much of this money, or if any, was embezzled or
stolen by the appellants. The whole theory of the
Government's case was to show that the appellants
and their agents made nineteen false and fraudulent
representations as to the mining claims and enter-
prises to various investors and that the promises were
false and known to the appellants to be false at the
time they were made. The evidence also showed that
the appellants used the mails from the beginning to
the end of the scheme and, although the mailings were
by the appellant Nemec, nevertheless appellant Daw-
son did know and could not have helped but know-
that the mails were used by the principal in this case.
Dawson was a party to a continuing conspiracy and
was responsible for substantive offenses committed
by his co-conspirator, Nemec, although he may not
have known of all of the substantive offenses. Pinker-
ton V. United States, 328 U. S. 640.
It is submitted that the record taken as a v/hole is
remarkably free from error of any sort; that the only
41
exceptions taken in the whole case were as to the ad-
missibility of certain exhibits which were later con-
nected up with the defendants beyond any doubt and
that the trial court was unduly solicitous in seeing
that the defendants got a fair trial before an impar-
tial jury under standards of fairness and justice
which have been approved by this court and the high-
est court of the land.
Respectfully submitted,
HARVEY ERICKSON,
United States Attorney.
FRANK R. FREEMAN,
Asst. United States Attorney.
Attorneys for Appellee.
No. 11976
(Hanvt of Apjirala
for ttf» Ninttf OTirrtiit
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
©rattarript of IS^nath
Upon Petition to Review a Decision of The Te
of the United States
SEP Z 3 1948
PAUL p, cmmtMS^
Typo Preis, 398 Pacific, San Francisco 9-9-48 — 60
No. 11976
(Hmvt 0f KppmU
fat tljp Nintli (EirntU
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
WrmBtrxpt of U^rorli
Upon Petition to Review a Decision of The Tax Court
of the United States
INDEX
[Clerk's Note: When deemed likely to be of an important nature,
errors or doubtful matters appearing in the original certified record
are printed literally in italic; and, likewise, cancelled matter appear-
ing in the original certified record is printed and cancelled herein
accordingly. When possible, an omission from the text is indicated by
printing in italic the two words between which the omission seems
to occur.]
PAGE
Amended Petition 4
Exhibit A (Attached to Original Petition)
Notice of Deficiency 10
Answer to Amended Petition 16
Appearances 1
Certificate of Clerk to Transcript of Record. . . 141
Decision 31
Designation of Contents of Record — Agreed to
(USTC) 138
Designation of Record, Statement of Points
and (USCA) 142
Docket Entries 1
Findings of Fact and Opinion 18
Petition, Amended 4
Petition for Review 32
Notices of Filing 39, 40
Statement of Evidence — Agreed to 41
11.
PAGE
Exhibits for Respondent:
F — Final Corporation Excess Profits Tax
Return for Grace Bros., Inc., for year
1943 122-127
Admitted in Evidence 42
H — Final Excess Profits Tax Return of
Grace Bros., Inc., for year 1943 128-130
Admitted in Evidence 42
I — Nine Telegrams dated from Dec. 28, 1942,
to Jan. 2, 1943, Interchanged by Garrett
& Co., Inc., and Joseph T. Grace 71-75
Admitted in Evidence 70
J— Copy of Letter dated Mar. 29, 1943, to
Garrett & Co., by The DeTurk Winery by
Manuel Felciano, Attorney-in-Fact 131
Admitted in E^ddence 101
K— Letter dated May 26, 1943, L. A. Weller
to Joseph T. Grace 132
Admitted in Evidence 101
L— Letter dated June 18, 1943, Garrett & Co.
by L. A. Weller to Joseph T. Grace 134
Admitted in Evidence 101
M — Inter-office Letter dated Nov. 5, 1946, L.
A. Weller to J. Campbell Moore of Gar-
rett & Co 135
Admitted in Evidence 101
111.
PAGt
Witnesses for Petitioner:
Grace, Joseph T.
— direct 46
— cross 61
—redirect 81, 92
— recross 87
Morrow, A. R.
— direct 42
— cross 45
Tapp, Jesse
— direct 93
— cross 99
Statement of Points (USTC) 40
Statement of Points and Designation of Rec-
ord (USCA) 142
Stipulation of Facts 103
Exhibit 1-A — Copy of Invoice used by Grace
Bros., Inc., for Wine Sold Under Trade
Name of The DeTurk Winery 109
Exhibit 2-B — Memorandum of Agreement for
Sale and Lease, dated Jan. 20, 1943, ad-
dressed to Garrett & Co., Inc., by Joseph
T. Grace Ill
Exhibit 3-C— Lease dated Jan. 30, 1943, by
and between Grace Bros., Inc., and Jos. T.
Grace, Lessor, and Garrett & Co., Lessee . . 116
Exhibit 4-D — Schedule Showing Net Income
of Winery Business from 1936-1940 121
Stipulation of Portion of Record to be Printed
(USCA) 144
APPEARANCES
For Petitioner:
GEORGE H. KOSTER, Esq.,
BAYLEY KOHLMEIER, Esq.
For Respondent:
W. J. McFARLAND, Esq.
Docket No. 9766
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
DOCKET ENTRIES
1945
Dec. 10 — Petition received and filed. Taxpayer no-
tified. Fee paid.
Dec. 11 — Copy of petition served on General Coun-
sel.
1946
Jan. 15 — Answer filed by General Counsel. Copy
served 1/18/46.
Jan. 15 — Request for hearing at San Francisco,
filed by General Counsel. Served.
Jan. 18 — Notice issued placing proceeding on San
Francisco, California calendar.
Oct. 4 — Hearing set December 2, 1946 — San Fran-
cisco, California.
Nov. 27 — Joint motion for continuance filed. 11/29/-
46 Granted, next San Francisco Calendar.
2 Grace Bros., Inc., vs.
1947
Feb. 2^^-Motion for leave to file the attached
amended petition, amendment lodged, filed
by taxpayer. 2/25/47 Granted.
Feb. 26 — Copy of motion and amended petition
served on General Counsel.
Mar. 19 — Answer to amended petition filed by Gen-
eral Counsel. 3/21/47 Copy served.
Mar. 28— Hearing set May 26, 1947— San Francisco,
California.
May 26, 27 — Hearing had before Judge Johnson on
merits. Stipulation of facts filed, (para-
graph 18 has been deleted and also first
sentence of paragraph 19). Petitioner's
brief 7/11/47. Commissioner's brief
8/26/47. Reply brief 9/16/47.
June 23 — Transcript of hearing 5/26/47 filed.
July 7 — Brief filed by taxpayer.
Aug. 25 — Brief filed by General Counsel.
Aug. 26 — Petitioner's brief served on General Coun-
sel.
Sept. 12— Reply brief filed by taxpayer. 9/15/47
Copy served.
1948
Jan. 27 — Memorandum findings of fact and ox)inion
rendered. Judge Johnson. Decision will
be entered under Rule 50. Coi)y served
1/27/48.
Commissioner of Internal Revenue 3
1948
Mar. 1 — Computation for entry of decision filed by
General Counsel.
Mar. 4 — Hearing set 3/31/48 on settlement.
Mar. 31 — Hearing had before Judge Johnson on set-
tlement. Not contested.
Apr. 5 — Decision entered. Judge Johnson. Div.
10. [1*]
June 14 — Petition for review by U. S. Circuit Court
of Appeals, 9th Circuit, with assignments
of error filed by taxpayer.
June 15 — Proof of service filed.
June 21 — Notice of filing petition for review with
affidavit of service thereon, filed by tax-
payer.
June 21 — Statement of points filed by taxpayer
with affidavit of service thereon.
June 21 — Statement of evidence filed by taxpayer
with affidavit of service by mail thereon.
6/24/48 Agreed to.
June 21 — Designation of record filed by taxpayer
with affidavit of service by mail thereon.
6/24/48 Agreed to. [2]
* Page numbering appearing at foot of page of original
certified Transcript of Eeeord.
4 Grace Bros., Inc., vs.
The Tax Court of the United States
Docket No. 9766
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
AMENDED PETITION
The above named petitioner hereby petitions for
a redetermination of the deficiency set forth by the
Commissioner of Internal Revenue in his notice of
deficiency (symbols IRA:90D HVH & LB) dated
September 20, 1945, and as a basis of this proceed-
ing alleges as follows:
1. The petitioner is a corporation with principal
ofi&ce at 806 Donahue Street, Santa Rosa, California.
The return for the period here involved was filed
with the Collector for the First District of Cali-
fornia.
2. The notice of deficiency (a copy of which is
attached to the original petition and marked Exhibit
A) [3] was mailed to the petitioner on September
20, 1945.
3. The taxes in controversy are declared value
excess-profits taxes for the calendar year 1943 in
the amount of $10,740.53 and corporation excess
profits taxes for the calendar year 1943 in the
amount of $136,103.60, consisting of a proposed de-
ficiency in the amount of $114,190.49 and a claimed
overpayment in the amount of $23,913.11.
Commissioner of Internal Revenue 5
4. The determination of tax set forth in the said
notice of deficiency is based upon the following
errors :
(1) The Commissioner erred in determining that
the stock of wine sold by petitioner during the year
1943 was not a capital asset and that the gain de-
rived from the sale thereof was ordinary income
and not capital gain.
(1-a) The Commissioner erred in determining
that the profit realized by petitioner from the sale
of its winery business in 1943 was ordinary income
and not capital gain.
(2) The Commissioner erred in failing to allow
as a deduction the California Bank and Corporation
Franchise Tax based upon the net income of peti-
tioner for the calendar year 1943.
(3) The Commissioner erred in failing to de-
termine that petitioner overpaid its corporation ex-
cess profits tax for the year 1943. [4]
(4) The Commissioner erred in including as tax-
able income in 1943 a capital gain from the sale of
a winery and vineyard plant in the amount of $99,-
002.64 since said sale occurred in 1944.
5. The facts upon which the petitioner relies as
the basis of this proceeding are as follows:
(a) Petitioner is a corporation organized under
the laws of the State of California and having its
principal place of business in the City of Santa
Rosa, State of California.
(b) Petitioner keeps its books and records and
makes its income tax returns on the accrual basis of
accounting.
6 Grace Bros., Inc., vs.
(c) Prior to 1943 petitioner had been engaged
among other things in the business of making and
selling wines. In January, 1943, petitioner discon-
tinued its business of making and selling wines and
leased the buildings and machinery and equipment
which it had used in the making of wine. At the
time it discontinued the business of making wine
petitioner had on hand 418,761 gallons of wine.
During the year 1943 petitioner sold all of said wine
for a total price of $219,179.91. The cost to peti-
tioner of said wine was $79,046.33 and petitioner
realized [5] a gain in the amount of $140,133.58
from the sale thereof. All of said wine had been
held by petitioner for a period of six months or
more at the time of the sale thereof. Said wine con-
stituted a capital asset and the gain realized from
the sale thereof constituted long-term capital gain
wdthin the meaning of Section 117 of the Internal
Revenue Code.
(c)-l. The sale of the wine as alleged in the pre-
ceding paragraph hereof was in fact a part of the
sale by petitioner of its winery business including
the intangible value of said business and the gain
of $140,133.58 treated by respondent as gain from
sale of wine, was gain on sale of the intangible
value of said winery business. The said intangible
asset and value of said winery business was estab-
lished more than six months prior to the petitioner's
sale thereof, so the entire profit realized thereon
should be taxed as a long term capital gain. [6]
(d) In determining its income and excess profits
taxes for the year 1943 petitioner treated the gain
Commissioner of Internal Revenue 7
realized from the sale of said wine and winery busi-
ness as long-term capital gain. In redetermining
petitioner's net income and excess profits taxes for
the year 1943 the respondent erroneously treated the
gain from the sale of said wine and winery busi-
ness as ordinary income, and as a result thereof
erroneously overstated petitioner's declared value
excess-profits tax liability and its corporation excess
profits tax liability.
(e) On December 31, 1943, petitioner became li-
able to the State of California for a corporation
franchise tax based upon and measured by peti-
tioner's net income for the year [7] 1943. On De-
cember 31, 1943, said franchise tax accrued under
the law of California and became a lien upon the
real property of petitioner, which lien had the same
force and priority as a judgment lien. In its Cali-
fornia franchise tax return of its income for 1943,
petitioner reported a franchise tax liability in the
amount of $9,385.03. Petitioner is informed and be-
lieves, and on the basis of such information and be-
lief, alleges that as the result of adjustments in its
income for the year 1943, as determined and made
by respondent, its California franchise tax, based
upon and measured by its net income for the year
1943, was and will be increased to the sum of $12,-
779.55. Petitioner failed to take any deduction in
its income and excess profits tax returns for 1943
for any part of said franchise tax. In determining
petitioner's net income and tax liability for the year
1943, respondent erroneously failed and refused to
allow petitioner a deduction for any part of said
8 Grace Bros., Inc., vs.
franchise tax based upon and measured by its net
income for 1943.
(f) As the result of the errors hereinabove al-
leged, respondent overstated petitioner's [8] de-
clared value excess-profits tax for the year 1943 by
the amount of $1,686.90 and overstated petitioner's
corporation excess profits tax by the amount of
$136,103.60. Petitioner's declared value excess pro-
fits tax for the year 1943 did not exceed the sum
of $13,805.89 and petitioner's corporation excess
profits tax for the year 1943 did not exceed $16,-
823.19.
(g) Petitioner duly filed its corporation excess
profits tax return for the year 1943 on or l^efore
March 15, 1944. In said return petitioner reported
an excess profits tax in the amount of $38,736.30.
Said excess profits tax was duly paid by petitioner
to the Collector of Internal Revenue for the First
District of California during the year 1944. As a
result of errors alleged herein and other adjust-
ments made by respondent, petitioner overstated
and overpaid its excess profits tax liability for the
year 1943 by the amount of $21,913.11. No part of
said overpayment has been repaid or refunded to
petitioner, and the entire amount thereof is now due,
owing and unpaid.
(h) In the computation of the deficiency against
which this petition is filed, the respondent treated
the sale of wine and the sale [9] of the winery as
occurring in the year 1943. In recognition of the
fact that the sale of the wine and the winery was
part of a continuing transaction which was com-
Commissi one)- of hitcnial Revenue 9
pleted in the year 1943, the petitioner did not con-
test the Commissioner's conclusion that the entire
transaction was a 1943 transaction. However, in the
event the Commissioner should contest that conclu-
sion in this proceeding, the petitioner alleges that
the sale of the winery did not take place until 1944
and the gain of $99,002.64 resulting from that sale
constitutes taxable capital gain in 1944 and the Com-
missioner was in error in including said gain in the
year 1943.
Wherefore, petitioner prays that this Court may
hear the proceeding, redetermine petitioner's net in-
come for the year 1943, and determine that peti-
tioner's declared value excess-profits tax for the
year 1943 did not exceed $2,752.26 ; that petitioner's
corporation excess profits tax for the year 1943 did
not exceed $16,823.19; that petitioner overpaid its
declared value excess profits tax and its corporation
excess profits tax for the year 1943 by the aggregate
amount of $23,913.11; that the Court expressly de-
termine, as a part of its decision, that said overpay-
ment of $23,913.11 was paid within two years before
the mailing [10] of the deficiency notice herein; and
grant such other and further relief as may be
proper.
/s/ GEORGE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Counsel for Petitioner.
(Duly Verified.) [11]
10 Grace Bros., Inc., vs.
EXHIBIT A
Treasury Department
Internal Revenue Service
74 New Montgomery Street
San Francisco 5, California
Sept. 20, 1945
Office of Internal Revenue Agent in Charge,
San Francisco Division
IRA:90-D HVH & LB
Grrace Bros. Inc.
806 Donahue Street
Santa Rosa, California
Grentlemen :
You are advised that the determination of your
income tax liability for the taxable year ended De-
cember 31, 1943 discloses an overassessment of $10,-
731.62 and that the determination of your declared
value excess-profits tax liability for the year men-
tioned discloses a deficiency of $10,740.53 and that
the determination of your excess profits tax liability
for the year mentioned discloses a deficiency of
$114,190.49 as shown in the statement attached.
In accordance with the provisions of existing in-
ternal revenue laws, notice is hereby given of the
deficiency or deficiencies mentioned.
Within 90 days (not counting Sunday or a legal
holiday in the District of Columbia as the 90th day)
from the date of the mailing of this letter, you may
file a petition with The Tax Court of the United
States, at its principal address, Washington 25,
Commissioner of Internal Revenue 11
D. C, for a redetermination of the deficiency or
deficiencies.
Should you not desire to file a petition, you are
requested to execute the enclosed form and forward
it to the Internal Revenue Agent in Charge, San
Francisco 5, California for the attention of Confer-
ence Section. The signing and filing of this form
will expedite the closing of your return (s) by per-
mitting an early assessment of the deficiency or de-
ficiencies, and will prevent the accumulation of in-
terest, since the interest period terminates 30 days
after filing the form, or on the date assessment is
made, whichever is earlier.
Very truly yours,
JOSEPH D. NUNAN, JR.,
Commissioner,
By /s/ F. M. HARLESS,
Internal Revenue Agent in Charge.
Enclosures: Statement, Form of Waiver, Claim.
STATEMENT
San Francisco IRA:90-D HVH & LB
Grace Bros. Inc.
806 Donahue Street
Santa Rosa, California
Tax Liability for the Taxable Year Ended
December 31, 1943
Over-
Liability Assessed assessment Deficiency
Income tax $ 57,932.86 $68,664.48 $10,731.62 $
Declared value
excess-profits
tax 15,492.79 4,752.26 10,740.53
Excess profits
tax 152,926.79 38,736.30 114,190.49
12 Grace Bros., Inc., vs.
In making this determination of your income, de-
clared value excess-profits, and excess profits tax
liability, careful consideration has been given to
your protest dated May 28, 1945 and to the state-
ments made at the conference held on June 11, 1945.
The overassessment shown herein will be made
the subject of a certificate of overassessment which
will reach you in due course through the office of
the collector of internal revenue for your district,
and will be applied by that official in accordance
with section 322 of the Internal Revenue Code, pro-
vided that you fully protect yourself against the
rmming of the statute of limitations with respect to
the apparent overassessment referred to in this
letter, by filing with the collector of internal rev-
enue for your district, a claim for refund on form
843, a copy of which is enclosed, the basis of which
may be as set forth herein.
A copy of this letter and statement has been
mailed to your representative, George Koster, Esq.,
300 Montgomery Street, San Francisco, California,
in accordance with the authority contained in the
power of attorney executed by you and on file in
this office. [14]
Commissioner of Internal Revenue 13
Adjustments To Net Income
Net income for declared value excess-profits tax
computation as disclosed by return $272,003.88
Unallowable deductions and
additional income :
(a) Income from the sale of wine $140,133.58
(b) Depreciation 6,138.74
(c) Political contributions 2r)0.00 146,522.32
Total - - $418,526.20
Nontaxable income and additional
deductions :
(d) Capital gain $ 41,130.94
(e) Capital stock tax 2,500.00
(f ) Cost of goods sold 3,052.55
(g) California franchise tax 4,473.10 51,156.59
Net income for declared value excess-profits tax
computation adjusted $367,369.61
Explanation of Adjustments
(a) On your return form 1120 schedule "C" there
was reported as a capital gain a profit of $140,133.58,
realized on the sale of your inventory of wine at the
De Turk Winery, and computed as f oUow^s :
Sales proceeds $219,179.91
Cost of inventory... 79,046.33
Profit realized $140,133.58
Information submitted shows that this wine inven-
tory constituted the stock in trade held by you at the
De Turk Winery, for sale to customers in the ordi-
nary course of business which was regularly and con-
tinuously carried on by you at the De Turk Winery ;
that the entire inventory was sold in one transaction
to Garrett & Co. made pursuant to a written agree-
ment executed on January 20, 1943. Under the terms
of this written agreement the only asset sold was
your wine inventory.
It is, therefore, held that the transaction did not
constitute the sale of a capital asset, held for more
than six months, under the provisions of section 117
14 Grace Bros., Inc., vs.
of the Internal Revenue Code; and furthermore, it
is held that the profit realized constituted ordinary
income, taxable in full.
The profit of $140,133.58 is therefore transferred
from the schedule of total capital net gains and in-
cluded herein as ordinary income. [15]
(b) The deduction of depreciation is decreased
$6,138.74 as disclosed by Exhibit A of this statement.
(c) The deductions claimed on your return include
$250.00 representing a contribution to a political cam-
paign fund. Since this expenditure is not an ordinary
and necessary business expense or an allowable con-
tribution, the deduction claimed is disallowed.
(d) Reported gain of $140,133.58 on the sale of
capital assets is decreased $41,130.94 as follows :
(1) Income from the sales of wine eliminated
from capital gain $140,133.58
(2) Gain on the sale of winery and vineyard
plant, omitted from return..... 99,002.64
Decrease in capital gain... $ 41,130.94
(1) Income from the sale of wine is held to be or-
dinary income as explained under item (a) of the
foregoing.
(2) You failed to report income from the sale of
a winery and vineyard plant. Capital gain on this
transaction is included as follows:
Proceeds of sale December 31, 1943 $150,000.00
Cost as disclosed by Exhibit B of this statement.... 50,997.36
Capital gain - $ 99,002.64
(e) The deduction for capital stock tax is in-
creased $2,500.00 as follows:
Capital stock tax at $1.25 per thousand on declared
value of $4,000,000.00 as of June 30, 1944, which
accrued July 1, 1943 $5,000.00
Amount claimed $2,500.00
Increase - $2,500.00
Commissioner of Internal Revenue 15
(f) On December 31, 1942 assets of the Grace
Brothers Brewing Co. were distributed to the stock-
holders. You ow^ned 51 per cent of the stock of the
Grace Brothers Brewing Co. and 49 per cent of the
stock was owned by Frank P. Grace Company. You
received 51 per cent of said assets as a dividend and
49 per cent of said assets in a taxable exchange from
the Frank P. Grace Company on the same date. In
adjusting your 1942 income tax liability it was held
that the value of the net assets was $113,702.46 in
excess of the value as reported by you. Your 1942
net income was increased as follows : [16]
Capital gain iiiereasetl $ 54,740.76
Dividends increased 58,961.70
Total _ $113,702.46
The increase is due to increase in value of various
assets as follows:
Cash - $ 49.99
Accounts and notes receivable 723.92
Inventories - 3,052.55
Stocks 54,091.29
Buildings 21,308.49
Machinery and Equipment 23,210.62
Automobiles and trucks 7,143.75
Furniture and fixtures 1,121.85
Land 8,000.00
Total assets $118,702.46
Less: Accounts payable assumed by you 5,000.00
Increase in net assets $113,702.46
The increase in inventories of malt and hops is de-
termined as follows :
Santa Rosa inventory revised $8,161.86
As shown on return 6,800.00 $1,361.86
Sacramento inventory revised $4,909.69
As shown on return 3,219.00 1,690.69
Net increase in inventories at December 31, 1942 $3,052.55
16 Grace Bros., Inc., vs.
Such increase in inventories taken over December
31, 1942 constitutes an additional cost of goods sold
in 1943, and an additional deduction is allowed there-
loz.
(g) California franchise tax accrued during 1943,
v\'hich is based on 1942 net income, is increased $4,-
026.29 as foUows:
Increase in 1942 net income :
Capital gain increased $ 54,740.76
Dividends increased - 58,961.70
Total $113,702.46
Less:
Capital stock tax increased 1,875.00
Net increase in franchise tax income $111,827.46
Franchise tax at 4 per cent on $111,827.46 $ 4,473.10
[Endorsed] : Filed Feb. 24, 1947. [17]
[Title of Tax Court and Cause.]
ANSWER TO AMENDED PETITION
Comes now the Commissioner of Internal Rev-
enue, respondent above named, by his attorney, J.
P. Wenchel, Chief Counsel, Bureau of Internal
Revenue, and for answer to the amended petition
in the above proceeding, admits and denies as fol-
lows:
Commissioner of Internal Revenue 17
1 and 2. Admits the allegations contained in
paragraphs 1 and 2 of the amended petition.
3. Admits that the taxes in controversy are de-
clared value excess-profits taxes and excess profits
taxes for the calendar year 1943 ; denies the remain-
ing allegations contained in paragraph 3 of the
amended petition.
4 (1) and (1-a), (2), (3), (4). Denies that the de-
termination of tax set forth in the notice of de-
ficiency is based upon error as alleged in subpara-
graphs (1) and (1-a), (2), (3), and (4) of para-
graph 4 of the amended petition. [34]
5 (a), (b). Admits the allegations contained in
subparagraphs (a) and (b) of paragraph 5 of the
amended petition.
(c) and (c-1)), (d), (e), (f), (g). Denies the al-
legations contained in subparagraphs (c) and (c-1),
(d), (e), (f), and (g) of paragraph 5 of the
amended petition.
(h). Admits that the respondent in his deter-
mination of the petitioner's tax liability treated the
sale of petitioner's wine inventory and the sale of
petitioner's winery as occurring in the year 1943;
denies the remaining allegations contained in sub-
paragraph (h) of paragraph 5 of the amended
petition.
6. Denies generally and specifically each and
every allegation in the amended petition not herein-
before admitted, qualified, or denied.
18 Grace Bros., Inc., vs.
Wherefore, it is prayed that the Commissioner's
determination be approved and the petitioner's ap-
peal denied.
/s/ J. P. WENCHEL, PMM
Chief Counsel, Bureau of
Internal Revenue.
Of Counsel:
B. H. NEBLETT,
Division Counsel.
T. M. MATHER,
W. J. McFARLAND,
Special Attorneys, Bureau of
Internal Revenue.
[Endorsed] : Filed March 19, 1947. [35]
10 T. C. No. 21
The Tax Court of the United States
Grace Bros, Inc., Petitioner, vs. Commissioner of
Internal Revenue, Respondent.
Docket No. 9766
Promulgated January 27, 1948
FINDINGS OF FACT AND OPINION
1. A corporation, regularly engaged in the manu-
facture and sale of wine, sold its entire stock and
leased its winery to the purchaser after its sole
shareholder had decided to discontinue the business.
The lease was cancelled the following year and the
corporation sold the winery to a purchaser uncon-
nected with the lessee.
Commissioner of Internal Revenue 19
(a) The evidence adduced, held, not to sup-
port a finding that any part of the considera-
tion paid for the wine was applicable to the
good-will of the business.
(b) Profit from the sale of the wine, held,
ordinary income and not capital gain as the in-
tent to discontinue the business did not convert
stock in trade into a capital asset.
2. The California franchise tax imposed for the
privilege of doing business in 1944, which tax is
measured by income realized in 1943, held, not ac-
crued and deductible in 1943. Central Investment
Corporation, 9 T.C. 128.
George H. Koster, Esq., for the petitioner.
W. J. McFarland, Esq., for the respondent. [36]
The Commissioner determined deficiencies of
$10,740.53 and $114,190.49 in petitioner's declared
value excess profits tax and excess profits tax, re-
spectively, for 1943, in part by treating as ordinary
income a profit from the sale of its entire stock of
wine, and by adding to income reported a capital
gain of $99,002.64 from the sale of its winery. No
deduction was claimed or allowed for an amount
paid in 1944 to California as a franchise tax. Peti-
tioner contends that since it was in liquidation, its
wine stock was a capital asset ; that the profit from
sale is taxable as a capital gain and that the fran-
chise tax is deductible as accrued in 1943. The
parties are now agreed that the winery was sold in
1944, and that the resulting gain is not taxable in
1943.
20 Grace Bros., Inc., vs.
FINDINGS OF FACT
Petitioner, a California corporation with prin-
cipal place of business at Santa Rosa, California,
keeps its books on an accrual basis of accounting
and filed its 1943 income tax returns, prepared on
that basis, with the collector of internal revenue
for the first district of California. In 1943 and for
many years prior thereto it has engaged in various
enterprises, including farming, grape growing and
the manufacture and sale of wines and beer. It
owned stock in other corporations, among them
Grace Brothers Brewery of Los Angeles, the Fresno
Brewing Company and the Santa Rosa Ice & Cold
Storage Co. All of petitioner's stock was owned by
its president and manager, Joseph T. Grace, of
Santa Rosa, a man active in numerous civic, finan-
cial, industrial and agricultural enterprises, and for
over twenty years a vice-president of the Bank of
America.
In 1921 petitioner purchased a vvine-manufactur-
ing plant, long known to the trade as DeTurk Win-
ery. It operated the plant until 1943, producing
[37] from grapes grown by it or bought from others
sweet and dry types of wine and some brandies
which it sold to a regular clientele partly in bottles
bearing the label ''DeTurk Winery" and partly in
barrels to wholesale customers who bottled and sold
it mider their own labels. "The DeTurk Winery,
Established 1876" appeared above petitioner's name
on its invoices. Petitioner's product was accepted
by the trade as a wine of high quality; it was sue-
1936
$26,610.18
1939
1937
33,184.93
1940
1938
20,377.92
1941
1942
Commissioner of Internal Beveniie 21
cessfully marketed, and the net profit from its sale
for the years 1936-1942 was as follows:
$16,100.84
10,459.86
7,995.20
18,959.53
In 1941 petitioner's sales were 157,518 gallons of
dry wine in bulk and 8,888 gallons in bottles at an
average price of 22.6 cents a gallon, and 46,943 gal-
lons of sweet wine in bulk and 12,443 gallons in
bottles at an average price of 37.2 cents a gallon.
In 1942 it sold 114,046 gallons of dry wine in bulk
and 7,028 gallons in bottles at 22.2 cents a gallon,
and 46,009 gallons of sweet wine in bulk and 10,268
gallons in bottles at 36.8 cents a gallon. During the
years 1936-1942 petitioner's average investment in
this section of its business was $150,000, of which
roughly $60,000 was attributable to the plant and
$90,000 to inventory. As dry wine should be held
two years or more and red wine one year for aging,
petitioner kept a substantial inventory in stock.
Finding his numerous activities excessive, Grace
decided late in 1942 to discontinue the wine busi-
ness, and petitioner limited its production for that
year to 4,959 gallons extracted only from the grape
supply grown by it, whereas normallj^ its annual
production was about 200,000 gallons. Nonetheless
[38] it had an inventory of 522,761 gallons at the
end of the year, produced in 1942 and prior years.
In November 1942 Grace advised L. A. Weller, an
old acquaintance and ^dee-president of Garrett &
22 Grace Bros., Inc., vs.
Co., Inc., of New York, that he intended to abandon
the wine business. Weller manifested interest, ask-
ing the quantity of wine available for sale; saying
that his firm's lease on a California plant was about
to expire, and making inquiry about a lease of the
DeTurk winery and the possibility of installing in
it certain machinery. After Weller 's return to New
York, Garrett & Co. requested Grace by a telegram
of December 28, 1942, to submit details if ''inter-
ested in selling your inventory and leasing winery."
Grace replied the following day ''that we have sev-
eral purchasers for our inventory and lease of win-
ery and distillery"; offered specified quantities of
several types of wine at 40, 55, 60 and 65 cents a
gallon, respectively, and a lease "of winery, distill-
ery and bonded warehouse" for five years at an an-
nual rental of $12,000. In further negotiation by
telegraph, Grace inquired what part of the inven-
tory was of interest, adding :
* * * anxious to close deal immediately to get
part of sales in this year income tax returns
* * *
Agreement was reached by telephone and confirmed
by a telegram of Garrett & Co. to Grace on Decem-
ber 31, 1942. By the contract Garrett & Co. agreed
to purchase all petitioner's wine at 50 cents a gal-
lon; to pay 20 per cent of the purchase price im-
mediately, and to lease the winery for five years at
$10,000 annual rent. On the same day petitioner de-
livered 104,000 gallons; received $52,000 therefor
from Garrett & Co., and reported the profit on its
1942 income tax return. [39]
Commissioner- of Internal Revenue 23
There remained 418,761 gallons of wine, carried
on petitioner's books at $79,046.33, consisting of
248,635 gallons of dry wine and 170,126 gallons of
sweet wine. During 1943 petitioner made delivery
of this entire stock, receiving $124,317.50 for the
dry wine and $94,862.41 for the sweet wine. The
price paid for the latter was by agreement some-
what in excess of 50 cents a gallon because 73,628
gallons contained a higher sugar content than re-
quired by California standards. Garrett & Co. also
agreed to purchase 600 wine barrels from petitioner
at $4 each. On January 20, 1943, the parties signed
a detailed memorandum of the agreement, setting
forth its terms as above described, and on January
30 they signed the contemplated contract of lease.
By its terms petitioner leased to Garrett & Co. the
premises of the winery "together with all wine-
making machinery and equipment located therein"
and the right to use the spur track of a railroad on
the east side of the property. The annual rental w^as
fixed at |10,000 ; the term of the lease at five years
with right of renewal for an additional five years.
The lessee agreed to keep the equipment in good
working order and in a reasonable state of repair ;
it reserved the right to remove all machinery and
equipment installed by it within sixty days of the
lease's expiration. The lessor reserved a small of-
fice and the use of well water on the leased premises
for its adjoining cold storage plant. It agreed to
carry fire insurance except on equipment installed
by the lessee, and in case of damage to make repairs
24 Grace Bros., Inc., vs.
with due diligence. If the winery should be totally
destroyed, the lease was to terminate.
In giving possession to Garrett & Co. petitioner
surrendered its permit to manufacture and sell so
that the lessee could procure a permit to operate
[40] on the premises; turned over to the lessee all
its wine stocks, cooperage and labels, its list of cus-
tomers and its regular staff of eight or ten experi-
enced employees. Thereafter neither petitioner nor
Grace engaged in making or selling wines. Garrett
& Co. paid petitioner rent under the lease to the end
of April, 1944, when the parties terminated it by
mutual agreement. On April 15, 1944, petitioner
sold the winery to Taylor & Co. for $150,000. Taylor
& Co. was not a subsidiary of, or owned by Garrett
& Co.
On or about March 15, 1944, petitioner filed a
California Bank and Corporation Franchise tax re-
turn for 1943, indicating a tax due of $9,385.03,
which it paid in 1944. This tax was imposed for the
privilege of doing business in the state in 1944, and
was measured by income realized in 1943.
In computing petitioner's income tax, declared
value excess profits tax and excess profits tax for
1943, the Commissioner determined (1) that peti-
tioner realized ordinary income of $140,133.58 from
the sale of wine in 1943, and not a capital gain in
that amount as reported by it; and (2) that jDeti-
tioner realized a capital gain of $99,002.64 from the
sale of the winery. (3) Deduction of the California
franchise tax for 1943 was neither claimed by peti-
tioner on its return nor allowed by the Commis-
sioner.
Commissioner of Internal Revenue 25
OPINION
Johnson, Judge ; The parties are agreed that peti-
tioner realized a profit of $140,133.58 from the sale
transaction with Garrett & Co., but petitioner as-
sails the determination that this amount is taxable
as ordinary income, advancing three contentions
under which all or a part of such profit should he
classed as capital gain and so taxed. [41]
First, it argues that despite the literal language
of the sale contract and communications leading up
to it, the sale was not of wine merely but also of the
good will of the business. Grace testified that in his
preliminary negotiations with Weller he offered to
sell all the business and assets for $375,000 ; that he
arrived at this figure by assigning $125,000 to the
plant, $150,000 to the stocks of wine and $100,000
to good will, and that the price obtained for the
wine was intended to cover good will. This price
was $271,179.91, inclusive of the $52,000 received
and reported in 1942. We cannot find such an offer
upon the evidence adduced. In our opinion the tele-
grams affirmatively indicate that petitioner did not
seek to sell the plant because in pressing Garrett &
Co. for a decision, Grace wired that he had '* several
purchasers for our inventory and lease of winery
and distillery"; while nothing in the interchange of
communications even suggests an intention or off'er
to sell the winery.
In any event the actual transaction, not an un-
accepted offer, is determinative of tax incidence,
and even if Grace attempted to sell the plant and
business as an entirety, that attempt would not color
26 Grace Bros., Inc., vs.
the lease with the characteristics of a sale. Peti-
tioner cites several cases to the general effect that
a profitable business presumptively has good will,
Helvering vs. Security Savings & Commercial Bank
(C.C.A., 4th Cir.), 72 Fed. (2d) 875; [42] White &
Wells Co., 19 B. T. A. 416, and that when sold in its
entirety, a part of the consideration paid is properly
attributable to that good- will whether or not the sale
contract so specifies. Pfleghar Hardware Specialty
Co. vs. Blair, (C.C.A., 2nd Cir.), 30 Fed. (2d) 614;
Betts vs. United States, 62 Ct. CI. 1. Counsel
stresses that in giving possession of the winery,
petitioner turned over to Garrett & Co. its labels,
list of customers and staff of experienced employees
together with its existing stocks of wine, and we
are asked to hold that in so doing it necessarily con-
veyed the goodwill of its business.
We should be impressed by this argument if there
had been a sale, as in the cited cases, but under the
facts here shown the advantages of w^hatever good-
will was inherent in petitioner's business passed to
Garrett & Co. by lease, not by sale, and there is no
controversy about the rental. In making the lease it
is true that j)etitioner sold its entire stock of wines,
but a sale of merchandise, particularly of goods that
had been held as stock in trade, does not effect a
conveyance of the seller's good- will. In phrasing
his argument, counsel alleges "the transfer of peti-
tioner's entire winery business", including good-
will of a value of $100,000, and concludes that
"therefore $100,000 of the price received from Gar-
rett & Co. should be allocated as the amount re-
Commissioner of Internal Revenue 27
ceived for the said intangible or going-concern
value." But ^'the price received" was explicitly for
wine, and we are not convinced by Grace's testi-
mony that the amount of it exceeded the wine's fair
market value by $100,000 intended to cover good-
will. In the preliminary negotiations four different
prices per gallon were quoted for four grades of
wine, and the transaction was consummated on a
compromise price [43] of 50 cents a gallon for all
types and later adjusted upward slightly in respect
of wines having a high sugar content. This method
of price determination is wholly incompatible with
the theory that something more than wine was being-
bought, nor can we believe that Garrett & Co. would
have paid $100,000 above market to obtain good-
will which it abandoned a little over a year later by
cancelling the lease so that petitioner could sell the
winery to Taylor & Co. Significantly petitioner of-
fered no evidence of the market price of its grades
of wine in December 1942 apart from Grace's gen-
eral testimony that the price paid by Garrett & Co.
was excessive by $100,000. We are unable to make
such a finding or to hold that the sale contract cov-
ered any more than its terms indicate.
Second, petitioner argues that "the transaction
with Garrett & Co. involved the disposition of a
unitary business as distinguished from particular
assets, and therefore the entire profit from the
transaction should be treated as a long-term capital
gain." For the reasons above stated, we cannot ac-
cept petitioner's factual premise, and hence the
legal arguments based on it become moot. The
28 Grace Bros., Inc., vs.
** transaction" with Garrett & Co., we would point
out, was not single, but comprised a sale of wine
and barrels and the lease of a winery, and if it
could be treated for tax purposes as a unit, the
^'profit from the transaction" would comprise not
only the $140,133.58 gain from the wines delivered
in 1943, but also the undisclosed profit from the
sale of wine in 1942, from the sale of barrels and
from rents due under the five year lease which was
prematurely terminated. These considerations point
up the imsound character of petitioner's contention,
for under its own theory the entire proceeds of ''the
transaction" were not, and by their nature should
not have been, reported on its income tax return for
1942. [44]
Third, petitioner contends that because of an in-
tent to liquidate, followed by a "disposition" of the
entire business, its wine stocks lost their character
as stock in trade or property held for sale to cus-
tomers in the ordinary course of business and be-
came capital assets within the meaning of section
117(a)(1), Internal Revenue Code, so that all profit
from their sale is taxable as a capital gain, and since
the wine was held over six months (with exception
of the 4,959 gallons produced in 1942), as a long
term capital gain.
We are imable to agree with the view that Grace's
intention to liquidate converted petitioner's stock in
trade into capital assets and we hold here that the
wine's character as stock in trade was not lost and
did not change by virtue of Grace's decision to dis-
Commissioner of Infernal Revenue 29
continue petitioner's wine business and by petition-
er's sale of that stock in its entirety.
Petitioner cites Three States Lumber Co. vs.
Commissioner (C.C.A., 7th Cir.) 158 Fed. (2d) 61,
as to the contrary, but we are of opinion that by
implication it strongly supports our conclusion. The
taxpayer there terminated its business of cutting,
sawing and selling timber in 1919, and then en-
deavored to sell its land, but without success until
it began to sell parcels on the installment basis after
1930. Rejecting the Commissioner's contention that
its profits were taxable as ordinary income, the
Court held them capital gains because there was no
evidence to
* * * support the conclusion that petitioner
was engaged in business primarily for the pur-
pose of selling land to customers in the ordi-
nary course of its trade or business.
Inferentially if there had been such evidence, the
profits would have been ordinary income notwith-
standing liquidation. Graham Mill & Elevator Co.
vs. Thomas (C.C.A., 5th Cir.), 152 Fed. (2d) 564,
also cited by petitioner, even more strongly sup-
ports that view. The liquidating taxpayer there sold
all its assets, including notes and accounts receiv-
able, and on the latter it claimed [45] an ordinary
loss deduction. But the Circuit Court of Appeals
for the Fifth Circuit held the notes capital assets
and the loss a capital loss because the taxpayer:
* * * was not in the business of selling notes
and accounts, and had never so dealt with its
notes and accounts before.
30 Grace Bros., Inc., vs.
* * * They represented the taxpayer's busi-
ness capital, but were not a part of his stock
in trade.
Under such rationale it is to be inferred that
liquidation brought about no change in the assets'
classification and that if, as here, the taxpayer's
normal stock in trade had been the subject of con-
sideration, the decision would have been the reverse
of what it was. We adhere to the view that an in-
tent to discontinue business or to liquidate does not
convert stock in trade into a capital asset, and sus-
tain the Commissioner's determination that peti-
tioner's profit from the sale of wine is taxable as
ordinary income.
Petitioner assigned as error the Commissioner's
inclusion in 1943 income of a capital gain of $99,-
002.64 realized from its sale of the winery to Taylor
& Co. The parties have stipulated that this sale
occurred in 1944, and are agreed that the gain is
not taxable in 1943.
On its tax return for 1943 petitioner did not claim
and the Commissioner did not allow deduction of
$9,385.03, representing the California Bank and
Franchise Corporation tax covering the year 1943,
but paid in 1944. Petitioner contends that this tax
is deductible as accrued in 1943. This issue was de-
cided adversely to petitioner's contention in Central
Investment Corporation, 9 T.C. 128, and adhering
to that decision, we approve the Commissioner's ac-
tion.
Reviewed by the Court.
Decision will be entered under Rule 50. [46]
Commissioner of Internal Revenue 31
The Tax Court of the United States
Washington
Docket No. 9766
GRACE BROS., INC.,
Petitioner,
V.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
DECISION
This proceeding was called from the Hearing Cal-
endar of March 31, 1948, for settlement under Rule
50. No appearance was made on behalf of peti-
tioner, and the respondent's computation of tax
filed on March 1, 1948, was not contested. Now,
therefore, in accordance with said computation,
it is
Ordered and Decided: That there is an overpay-
ment in declared value excess-profits tax for the
calendar year 1943, of $240.04, which amount was
paid within three years before the mailing of the
notice of deficiency, which was mailed within three
years from the time the return was filed by the
taxpayer ; and there is a deficiency in excess profits
tax of $124,073.01 for said year 1943.
(Seal) /s/ LUTHER A. JOHNSON,
Judge.
Entered Apr. 5, 1948. [47]
32 Grace Bros., Inc., vs.
In the United States Circuit Court of Apjieals
For the Ninth Circuit
Tax Court Docket No. 9766
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
PETITION FOR REVIEW BY THE UNITED
STATES CIRCUIT COURT OF APPEALS
FOR THE NINTH CIRCUIT
To the Honorable, the Judges of the United States
Circuit Court of Appeals for the Ninth Circuit :
Grace Bros., Inc., a corporation, by its attorneys
hereby petitions this Honorable Court to review
the decision of the Tax Court of the United States,
entered on April 5, 1948, finding a deficiency in
excess profits taxes paid by petitioner for the cal-
endar year 1943 in the amount of $124,073.0L
I.
JURISDICTION
Petitioner is a corporation organized and existing
[48] under the laws of the State of California and
maintains its principal place of business in Santa
Rosa, California.
The excess profits tax return of petitioner for the
year 1943 was filed with the Collector of Internal
Revenue for the First Collection District of Cali-
fornia, in San Francisco, California, all within the
Commissioner of Internal Revenue 33
jurisdiction of the United States Circuit Court of
Appeals for the Mnth Judicial Circuit.
The jurisdiction of this Court to review the deci-
sion of The Tax Court of the United States afore-
said, is founded on Sections 1141 and 1142 of the
Internal Revenue Code.
II.
PRIOR PROCEEDINGS
On September 20, 1945, the Commissioner of In-
ternal Revenue mailed a notice of deficiency in
accordance with Section 272 of the Internal Reve-
nue Code, proposing a deficiency in excess profits
tax for the year ended December 31, 1943 in the
amount of $114,190.49. Petitioner duly filed its
l)etition for redetermination of said deficiency in
The Tax Court of the United States within the
time provided by law. A hearing before the Tax
Court was held in the City of San Francisco, Cali-
fornia on May 26, 1947. The Tax Court promul-
gated its findings of fact and opinion on January
27, 1948, and the decision of the Tax Court deter-
mining a deficiency in excess profits taxes for said
year in the amount of $124,073.01 was entered on
April 5, 1948. [49]
III.
NATURE OF CONTROVERSY
The controversy herein involves petitioner's cor-
rect excess profits tax liability for the year 1943,
which in turn depends upon the determination of
the following general issue:
1. Whether the gain, or any part thereof,
realized by petitioner in 1943 from the sale of
34 Grace Bros., Inc., vs.
its inventory of wine and its winery business
is long term capital gain or ordinary income
subject to excess profits tax.
Petitioner is a California corporation which was
organized in 1910 and which maintains its principal
]:)lace of business in Santa Rosa, California. In
1943 and for many years prior thereto petitioner
was engaged in various business enterprises, includ-
ing farming, cattle raising, manufacturing and sell-
ing ice, cold storage and manufacturing and selling
beer. From 1921 to 1942 petitioner was also en-
gaged in the business of manufacturing and selling
wine under the trade name of The DeTurk Winery.
The DeTurk Winery was built in 1876 and had been
continuously operated at the same location by peti-
tioner and the prior owners. The wine produced
and sold under the name of The DeTurk Winer}'
[50] was of better than average quality and en-
joyed a good reputation. The operating staff of
the winery also included valuable and well trained
men.
Some time prior to October 1942 petitioner de-
cided to go out of the winery business and to dis-
pose of The DeTurk Winery. As the result of this
decision petitioner limited its production of wine
in the 1942 vintage season to the grapes grown by
it and made efforts to sell the business.
In November or December 1942, Mr. Joseph T.
Grace, the president and sole stockholder of peti-
tioner, carried on negotiations and correspondence
with Garrett & Co. through Mr. Weller, the vice-
president, with regard to the sale of the wine and
Commissioner of Internal Revenue 35
winery business of petitioner to Garrett & Co. Mr.
Grace advised Mr. Weller that petitioner Avould not
sell its wine inventory unless it sold every thing-
connected with the wine business, including the
winery and the good will. At that time petitioner
had an inventory of 522,761 gallons of wine and
Mr. Grace further advised Mr. Weller that he
thought the winery was worth $125,000 and that
the inventory and good will was worth $250,000.
Mr. Grace based his determination of $250,000 for
the wine and good will by estimating that petitioner
could realize $150,000 from the wine by continuing
to sell it in the regular course of business and by
estimating the value of the good will at five times
the average annual net earnings of the wine busi-
ness, making a good will value of $100,000. [51]
After numerous conversations and telegrams, on
December 31, 1942 Garrett & Co. offered to lease
petitioner's winery and equipment for five years
at $10,000 annual rental and to purchase all of pe-
titioner's wine at 50 cents per gallon. Petitioner
accepted the offer and shipped 104,000 gallons that
day. In 1943 petitioner transferred the balance of
the wine, its bottles and cooperage, its DeTurk
Winery labels, its permits to manufacture wine, its
customer list, its winery personnel and possession
of the winery to Garrett & Co. As the total price
agreed upon was slightly greater than the price
asked by petitioner, Mr. Grace considered that pe-
titioner had sold the entire business, including good
will, to Garrett & Co. and that petitioner had vc-
36 Grace Bros., Inc., vs.
ceived $100,000 for the good will of the winery
business.
In its income tax return and its excess profits
tax return for 1943 petitioner treated the sale as a
sale of capital assets held for more than six months
and reported a long term capital gain in the amount
of $140,133.58. Respondent treated the gain from
the sale as ordinary business income and thereby
substantially increased petitioner's net income sub-
ject to excess profits tax and substantially increased
petitioner's excess profits tax liability for 1943.
In its appeal to the Tax Court petitioner pre-
sented the following contentions:
1. The transaction with Garrett & Co. involved
the disposition of a unitary business as [52] dis-
tinguished from particular assets, and therefore the
entire profit from the transaction should be treated
as long term capital gain and taxed accordingly.
2. When petitioner decided to discontinue mak-
ing wine and to dispose of the winery business, the
wine on hand ceased to be held for sale to custom-
ers in the ordinary course of petitioner's business,
and became a capital asset, and having been held
for more than six months (except the 4959 gallons
manufactured in 1942) the gain constituted long
term capital gain.
3. In any event at least $100,000 was received by
petitioner for its good will which was unquestion-
ably a capital asset and therefore at least $100,000
of the gain was long term capital gain realized from
the sale of the good will.
The Tax Court determined that transaction be-
Commissioner of Internal Revenue 37
tvveen iJetitioner and Garrett & Co. was not a dis-
position of the business as a unit and further deter-
mined that since the winery was leased and not sold
to Garrett & Co. and since the price was determined
on the basis of 50 cents per gallon for the wine, the
sale did not cover anything but wine, that the wine
was not converted into a capital asset and that no
part of the consideration received by petitioner was
received for good will or other intangible assets.
The Tax Court af&rmed the determination of re-
spondent. [53]
IV.
ASSIGNMENTS OF ERROR
In making and rendering its decision, as afore-
said, The Tax Court of the United States erred to
the prejudice of petitioner in the following respects :
1. In determining a deficiency in petitioner's
excess profits tax for the calendar year 1943 in the
amount of $124,073.01.
2. In failing to determine that there was no
deficiency in excess profits tax due from petitioner
for the year 1943 and that petitioner overpaid its
excess profits tax for said year by the amount of
at least $23,913.11.
3. In determining that the stock of wine sold
by petitioner during the year 1943 was not a capi-
tal asset and that the gain derived therefrom was
ordinary income and not capital gain.
4. In determining that the transaction with Gar-
rett & Co. did not involve the disposition of a uni-
tarj^ business, as distinguished from particular
assets, the profit from which should be treated as
long term capital gain.
38 Grace Bros., Inc., vs.
5. In determining that no part of the considera-
tion received by petitioner for its wine and other
assets connected with its winery business was re-
ceived for the good will of said winery business.
6. In failing and refusing to determine that at
least $100,000 of the consideration received by peti-
tioner for its wine and other assets connected with
the winery was received by petitioner for the good
will of petitioner's winery business.
7. In failing and refusing to accept the uncon-
tradicted testimony of the president of petitioner
that the petitioner sold its good will and that the
consideration received by petitioner upon the sale
of its wine and other assets of its winery business
exceeded the fair market value of the tangible
assets sold by at least $100,000 and that said $100,-
000 represented consideration received by petitioner
for the good will of its winery business.
Wherefore, petitioner prays that the decision of
The Tax Court of the United States be reviewed by
the United States Circuit Court of Appeals for the
Ninth Circuit and that a transcript of the record
be prepared in accordance with the law and with
the rules of said Court and transmitted to the Clerk
of said Court for filing, and that appropriate action
be taken to the end that the errors complained of
be reviewed and corrected by said Court.
/s/ GEORGE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner.
(Duly Verified.)
[Endorsed] : T.C.U.S. Filed June 14, 1948. [55]
Commissioner of Internal Revenue 39
[Title of Tax Court and. Cause.]
NOTICE OF FILING PETITION FOR
REVIEW
To: Charles Oliphant, Chief Counsel, Bureau of
Internal Revenue.
You are hereby notified that Grace Bros., Inc.,
did, on the 14th day of June, 1948, file with the
Clerk of The Tax Court of the United States, at
Washington, D. C, a petition for review by the
United States Circuit Court of Appeals for the
Ninth Circuit, of the decision of this Court hereto
fore rendered in the above entitled case. Copy of
the Petition for review as filed is hereto attached
and served upon you.
Dated this 15th day of June, 1948.
/s/ VICTOR S. MERSCH,
Clerk, The Tax Court of the
United States.
Service of copy of Petition for Review acknowl-
edged this June 15, 1948.
CHARLES OLIPHANT,
Chief Counsel, Bureau of Internal Revenue, Attor-
ney for Respondent.
[Endorsed] : Filed June 15, 1948. [57]
40 Grace Bros., Inc., vs.
[Title of Tax Court and Cause.]
NOTICE OF FILING PETITION FOR
REVIEW
To: Honorable Charles Oliphant, Chief Counsel,
Bureau of Internal Revenue, Washington, D. C.
You Are Hereby Notified that on June 14th of
1948, a Petition for Review by the United States
Circuit Court of Appeals for the Ninth Circuit of
the decision of The Tax Court of the United States
heretofore rendered on April 5, 1948 in the above-
entitled cause was filed with the Clerk of The Tax
Court.
A copy of said petition so filed is attached hereto
and served upon you.
/s/ GEORGE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner.
(Affidavit of Service by Mail attached.)
[Endorsed] : Filed June 21, 1948. [58]
[Title of Tax Court and Cause.]
STATEMENT OF POINTS TO BE RELIED
UPON ON APPEAL
Comes now the petitioner above named, by its at-
torneys of record, and states that it intends to rely
on appeal on all and each of the errors assigned
in the Petition for Review herein, and petitioner
Commissioner^ of Internal Revenue 41
hereby formally adopts the errors assigned in the
Petition for Review as its Statement of Points to
be Relied Upon on Appeal.
/s/ GEORGE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner.
(Affidavit of Service by Mail attached.)
[Endorsed] : Filed June 21, 1948. [60]
[Title of Tax Court and Cause.]
STATEMENT OF EVIDENCE
The following is a statement of all the evidence
submitted to The Tax Court of the United States
in the above-entitled cause which is material and
necessary for the determination of the assignments
of error set out by the petitioner on review in its
petition for review by th Circuit Court of Appeals
for the Ninth Circuit of the decision of The Tax
(^ourt of the United States.
The above-entitled cause came on for hearing at
San Francisco, California before the Honorable
Luther A. Johnson, Juge of The Tax Court of the
United States on May 26th and 27th, 1947. George
H. Koster appeared on behalf of petitioner and
W. J. McFarland appeared on behalf of respondent.
After the opening statement by counsel for the
parties, there was offered and received by the Tax
Court a Stipulation of Facts with exhibits attached
thereto.
42 Grace Bros., Inc., vs.
Thereupon, there was o:ffered and received in evi-
dence the following exhibits;
Respondent's Exhibit A — The tentative corpora-
tion income and declared value excess profits tax
return of Grace Bros., Inc., for the year 1942.
Respondent's Exhibit B — The final corporation
income and declared value excess profits tax return
of Grace Bros., Inc. for the year 1942.
Respondent's Exhibit C — The tentative corpora-
tion excess profits tax return of Grace Bros., Inc.
for the year 1942.
Respondent's Exhibit D — The final excess profits
tax return of Grace Bros., Inc. for the year 1942.
Respondent's Exhibit E — The tentative corpora-
tion income and declared value excess profits tax
return of Grace Bros., Inc. for the year 1943.
Respondent's Exhibit F — The final corporation
excess profits tax return of Grace Bros., Inc. for
the year 1943.
Respondent's Exhibit G — The tentative excess
profits tax return of Grace Bros., Inc. for the year
1943.
Respondent's Exhibit H — The final excess profits
tax return of Grace Bros., Inc. for the year 1943.
Thereupon,
MR. A. R. MORROW
was called as a mtness by petitioner and bavins:
been duly sworn testified as follows: [63]
Direct Examination
By Mr. Koster:
My present business address is 900 Minnesota
Street, San Francisco, California. For the past 55
Commissioner of Internal Revenue 43
(Testimony of A. R. Morrow.)
years I have been engaged directly or indirectly
in the manufacture and sale of wines and have been
and now am an officer of Fruit Industries, Ltd., one
of the largest cooperative organizations in Califor-
nia making and selling wine. In my position with
that organization I supervised the manufacture and
blending of wine by the various members of that
organization. During the years that The DeTurk
Winery, operated by Grace Bros., Inc., was in op-
eration I was consulted frequently on the blending
of the wines produced by The DeTurk Winery. I
am thoroughly familiar with the business and qual-
ity of the wines and brandies produced by The De-
Turk Winery.
I have for many years been engaged in classify-
ing wines. In classifying wines you determine
the alcohol, acids, color and general quality of the
goods. If you are buying you pay on those classi-
fications. That has been my end of the game for
the last 55 years. My classifications have been ac-
cepted by many different persons engaged in the
wine industry and wines have been purchased and
sold on the basis of those classifications.
In my opinion The DeTurk Winery has always
had the reputation of handling the very best wines.
Of course they had some inferior as well but since
Mr. Grace has owned the plant I have helped him
supervise the handling and manufacturing and
blending of his wines to meet certain standards
which have been above average. [64]
44 Grace Bros., Inc, vs.
(Testimony of A. R. Morrow.)
In the conduct of my work I have had occasion
to learn the general reputation of The DeTurk
wines in the wine industry and that reputation is
good.
Q. (By Mr. Koster) : In your experience, Mr.
Morrow, have you ever reached a conclusion as to
the value of a winery business insofar as it is re-
lated to the type of product and the quality of the
product produced by that winery?
A. Well, I only — this is my only idea — my idea
would be a fair value would be about five times the
net proceeds of the wine, or in that neighborhood.
I don't say it exactly.
Q. Do you believe that a winery producing a
(luality of wine that is above average has a value
to its business in excess of the value of the tangible
assets employed in that business?
Mr. McFarland: I object, if the Court please.
My objection goes to their line of questions. I say
it is no different from the previous ones and not
rendered any the less objectionable.
The Court: The question is whether or not this
witness knows by reason of his long association
with the winery business whether or not different
brands of wine affect the value of the wine, as to
whether it is true or not.
The Witness: It does affect the value.
The Court: Above its ordinary intrinsic value
on account of the brands ?
The Witness: The brands, and also the quality
of the wine.
Commissioner of Internal Revenue 45
(Testimony of A. R. Morrow.)
The Court: You know from your business ex-
perience that that is true, do you"?
The Witness: Yes, sir. [65]
The Court: And from knowledge and observa-
tion of what has been going on? Do you know that
from what you have seen?
The Witness: Yes.
The Court: I think the witness is qualified.
Q. (By Mr. Koster) : I will ask the question
again: Do you believe that The DeTurk Winery
business conducted by Grace Bros., Inc., had a
value, an intangible value, in excess or over and
above the value of the tangible assets employed in
the making and selling of that wine?
A. I do.
Cross Examination
Upon cross examination by Mr. McFarland, Mr.
Morrow testified as follows:
Q. (By Mr. McFarland) : Mr. Morrow, have you
ever evaluated the good will or intangible value of
a winery for any particular purpose other than
your owTi purpose?
A. No, I have not.
Q. You know nothing of the problems presented
in that connection? A. No.
Q. Now you have testified as to the value of a
clientele or build-up by product of wine of any
particular winery over and above its tangible value,
as I understand it, in this connection. Have you
made an investigation as to the tangible value of
the Grace Bros. Winery in Santa Rosa?
46 Grace Bros., Inc., vs.
(Testimony of A. R. Morrow.)
A. I have. I assist Mr. Grace in handling the
blending- and manufacturing of his wines, through
my advice,
Q. Over the years?
A. Yes. We used to own The DeTurk Winery
— the California Wine Association — and we orio'i-
nally sold it to Mr. Grace and I helped him [66]
along wherever I could to advance his quality and
sales and anything pertaining to the business.
There being no further questions Mr. Morr(nv
was excused.
Thereupon,
MR. JOSEPH T. GRACE
was called as a witness by petitioner and havins:
been duly sworn testified as follows:
Direct Examination
By Mr. Koster:
The tax liability shown on the income tax return
of Grace Bros., Inc. for the year 1943 was paid as
follows: March 15, 1944, $9,000.00; May 15, 1944,
$9,354.19; June 15, 1944, $18,354.19; September 15,
1944, $18,354.18; December 15, 1944, $18,354.18;
making a total pajrment for that year of $73,416.74.
The tax liability shown on the excess profits tax
return of Grace Bros., Inc. for the year 1943 was
paid as follows: March 15, 1944, $15,000.00; Jime
15, 1944, $4,368.15; September 15, 1944, $9,684.08;
December 15, 1944, $9,684.07; making a total pay-
ment for that year of $38,736.30.
Commissioner of Internal lievenue 47
(T('stimony of Josei^li T. Grace.)
The tax liability shown on the California fran-
chise tax return for the income year 1943 was paid
as follows: March 15, 1944, $2,000.00 May 15, 1944,
$2,692.52; September 15, 1944, $4,692.51; making
a total of $9,385.03.
My address is Santa Rosa, California. I am
President of Grace Bros., Inc., the petitioner in this
case, and have been President of the company since
about 1930. Prior to that time I was Vice-Presi-
dent. My brother died in 1930, I think, and after
his death I was made President. I own and control
practically all the stock of Grace Bros., Inc. [67]
I am President and a director of Joseph T. Grace
Farms, Inc., which is operating farms in Mendo-
cino County. I am President of Grace Bros.
Brewery, Ltd. in Los Angeles, which makes beei*
in Los Angeles and has a substantial business. T
am President of Buffalo Brewery at Sacramento,
which operates a brewery in Sacramento and has a
substantial business. I am President of the Cali-
fornia Ice Co. of Oakland, which makes ice in the
City of Oakland. I am Vice-President of the Bay
Cities Ice Co. in San Francisco, which makes ice
to supply the trade in San Francisco. I am Presi-
dent of the Santa Rosa Ice and Cold Storage Co.
which operates a cold storage plant at Santa Rosa
and supplies ice to the trade. I am a director of
the Bay Area Council that has to do with the nine
counties that border on San Francisco Bay, and
whose purpose is the advancement of those nine
48 Grace Bros., Inc., vs.
(Testimonj^ of Joseph T. Grace.)
counties. We have lately been xDutting in most of
our time trying to decide the best place or proper
place to locate the second bridge from San Fran-
cisco to Oakland. I am a director of the State
Board of Agriculture. I am a director of the Cali-
fornia State Fair Association. I am President of
the Sonoma County Fair.
For twenty years I was Vice-President in charge
of bank activities north of the Bay for Bank of
America. I am now a member of the Bank's Ad-
visory Committee. I am not as active with the
Bank as I used to be although I take part in super-
vising their loans at their bank in Santa Rosa and
their Healdsburg Branch at Healdsburg. Most of
the time when I was actively associated with the
Bank I had charge of the Bank's branches north
of the Bay up to Lake County and Mendocino
County. I visited those branches at intervals and
checked into the activities of the branch and the
loans particularly and other things that would have
to do with the operation of the branch. I had occa-
sion to review loans to determine the extent of the
[68] risk involved in the loans. I had occasion to
analyze statements submitted by persons asking
credit. I had occasion in those investigations to
determine the future earning power of any com-
panies or any business enterprise seeking credit or
extension of credit.
Q. (By Mr. Koster) : Have you ever had occa-
sion in your experience in that regard to determine
Commissioner of Internal Revenue 49
(Testimony of Joseph T. Grace.)
the vakie of the future earning power in so far as
the determination of risk on your extensions of
credit was concerned?
A. Well, I don't just quite understand you, Mr.
Xoster. You mean as to the value as it relates to —
Q. To any organization seeking credit as it re-
lates to future earning power.
A. Well, yes. Those are always considered, the
relation to the application for any loan that may be
made to the earning power of the corporation or
the individual to see that he has the earning ])owor
to repay the loan within a time, reasonable time,
according to the business that he may be engaged in.
Q. Did you consider any other factors in con-
nection with the organizations' setup of any com-
panies or business enterprises seeking extensions
of credit?
A. Well, frequently people would come or or-
ganizations would come in to seek a loan and they
w^ould ask or tell the purpose for which the loan
was to be used. Then we would either encourage
them or approve it or discourage it if we didn't
think it was based on the right foundation.
Q. Did you ever consider the reputation of the
management or the business in that regard?
A. Of the management?
Q. Did you ever consider the reputation of the
management or the business in that regard?
A. Always. [69]
In 1943 and prior years Grace Bros., Inc. had
an interest in several farms. Prunes were about the
50 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
biggest crop or one of the biggest crops. We raised
primes and sheep, hops, pears, grapes and the com-
pany also had an interest at that tune in the Grace
Bros. Brewery in Santa Rosa and also in Grace
Bros., Ltd. in Los Angeles. I think also in the
ice and cold storage business in Santa Rosa.
Grace Bros., Inc. owned some of the proi^erty
which it farmed and some of the property was
leased. Grace Bros., Inc. raised some gTapes and
operated The DeTurk Winery.
Grace Bros., Inc. acquired The DeTurk Winery
about 1921 and operated it until the sale. The
winery was built by Mr. Isaac DeTurk about 1876
and upon Mr. DeTurk 's death it passed to some
other hands and we bought it in 1921. We called it
Tlie DeTurk Winery because it was always kno^yn
as The DeTurk Winery and always operated as
The DeTurk Winery. The general business actiy-
ity of The DeTurk Winery was making and selling
sweet and dry Wines. The wine was sold at retail
and also at wholesale. We sold the bottled wine to
stores who resold it and we sold the wine to restau-
rants and other places bottled. We sold some of
it in barrels to concerns which bottled the wine
under their own label. We used the '^The DeTurk
Winc^ry" label on our own sales bottled. We sold
it wholesale to "yintners", a class of people in the
^yine trade who buy wines that they like and bottle
them under their own brands. We sold wine to
seyeral of those men engaged in that business under
their own label. We continued to sell to the same
Commissioner of Internal Revemte 51
(Testimony of Joseph T. Grace.)
class of customers every year since we started oper-
ating The DeTurk Winery. I think we might have
lust a customer occasionally but we held on to our
trade pretty well and we added some new ones as
we went along, but we kept pretty much to the
same class of trade. [70]
Some of the grapes from which we made the
wines were grown by the company and some were
purchased from grape growers in the district of
Sonoma County and we bought some grapes from
outside and shipped them in during the season.
It is necessary to age wine for a period of time
before it is salable. Dry white wine should be at
least two years old before it is bottled and dry red
wine should be a year. Sweet wine on account of
the higher alcohol content does not require the age,
although age will improve it.
Q. (By Mr. Koster) : Do you know how much
Avine was produced by The DeTurk Winery in the
years 1936 to 1942?
A. Well, we produced some brandy in that year
too, which I overlooked a few moments ago. In
1939 I think we produced quite a bit of brandy and
we made approximately 200,000 gallons of wine a
year, I would say.
Q. Mr. Grace, it is stipulated that in the year
1942 The DeTurk Winery produced 4,959 gallons
of wine. Is that less than what the winery usually
produced ?
A. Oh, yes. Considerably less.
52 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. And why did The DeTurk Winery produce
that smaller quantity of wine in that year?
A. Well, we had decided to go out of the wine
business.
Q. When did you make that decision?
A. Along in '42, I think.
Q. What month or what part of the year?
A. Well, it was before the vintage because we
decided we wouldn't make — the only wine we made
in '42 was from the grapes that the company had
on its own ranches. We crushed those, but we
decided on account of [71] our decision to go
out of the wine business and the fact that we had a
pretty good stock on hand also, that we would only
make up the grapes that we owned ourselves.
Q. Mr. Grace, did you actively manage all of
the business affairs of Grace Bros., Inc.?
A. Practically.
Q. Did you make any effort in 1942 to dispose
of Th(^ DeTurk Winery business?
A. Well, I know that we had it in mind that
eventually we would go out of the business. We
decided to do that about along towards the end
of '42.
Q. Did you make any effort to sell your winery
business ? A. Yes.
Q. Did you offer it for sale at any time?
A. Yes, I talked to different people on it, about
the sale of the winery, and the stock of the wine,
and everything that had to do with the winery.
We had a very good organization in the winery,
Commissioner of Internal Revenue 53
(Testimony of Joseph T. Grace.)
men that had been with me for a good many years,
and naturally I was anxious to so arrange a sale
that these men would have a job and have work to
continue. They had been very faithful and loyal.
Q. When did you first meet Mr. Weller, repre-
sentative of Garrett and Company?
A. I met Mr. Weller, Oh, I met Mr. Weller first
maybe ten or fifteen years ago. That is, I have
known him for a long time.
Q. Did you meet him at any time in connection
with any negotiations with respect to the sale of
the DeTurk .Winery? [72]
A. Yes. I met Mr. Weller in Fresno.
Q. When did you meet him there?
A. Well, it was just a short time before we made
the sale.
Q. What month and what year?
A. That was in November, I would say, the
latter part of November or early in December.
Q. Of 1942? A. 1942.
The Court: You mean when you met him or
when you made the sale?
The Witness: No, that is when I met him, your
Honor, and we discussed it. As I recall the con-
versation, he said, ''I "hear you have some wine to
sell," and I told Mr. Weller that that was right,
that we were going out of the wine business.
I also told him that we had a winery and that
I wouldn't sell the wine inventory unless I sold
everything in connection with the wine business,
that is, winery and the wine inventory and the good
54 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
will in it — everything that had to do with it, and
that we wanted to get ont of the business. We dis-
cussed things a little bit. He asked me about how
much wine we had and I remember I told him. He
asked me what our ideas were and what we wanted.
I told him I thought the winery was worth $125,-
000 and I told him that the wine inventory and the
good will, in my opinion, was worth $250,000. That
would be $375,000 for everything. I impressed on
him at the time, too, that we had a good organiza-
tion and I was anxious to have those men taken
care of. They were later taken over by Mr. Weller.
The Court : As I understand it, Mr. Weller was
acting for Garrett and Company? [73]
The Witness : Mr. Weller was acting for Garrett
and Company. He is Executive Vice President.
The Court: Vice President of the Company?
The Witness: Vice President of the Company,
yes, your Honor.
Q. (By Mr. Koster) : When you quoted the
price of $250,000 for the wine inventory and every-
thing that went with it, did you make any computa-
tion to arrive at that figure?
A. Yes. T figured at the rate we were selling
the wine at our current prices, that we should get
out of it about $150,000— somewhere in that neigh-
borhood — and there would have to be some expenses
maybe taken out of that for operating, so that I
figured if I could get, when I asked $250,000, that
1 would get the current value of the wine inventory
Commissioner of Internal Revenue 55
(Testimony of Joseph T. Grace.)
and there would be $100,000 for the good will which
T valued very highly.
Q. Did you conclude any final deal with Mr.
Weller at that time ?
A. Well, I think he said he would see about it
and I think it was a few days after — it might have
been a week or so — we had another meeting and he
said, ''Now, Mr. Grace, I would like to lease your
winery for a while. I think I would like to lease
the winery instead of buying it until I find out for
sure that it is going to suit us."
He said, ''The lease I have at Healdsburg," —
which is just 16 miles north from Santa Rosa —
"on my concentrator" — (Garrett and Company had
been buying grapes from Healdsburg and making
them into a grape juice, a grape syrup, which was
a concentrated form of grapes and they shipped
that grape syrup east and then added a certain
amount of water and other things to it and made
Avine of it) — he says, "My lease at Healdsburg is
out or will be out in a few months and I want a
place where I can move my concentrator." [74]
I was familiar with the concentrator and I knew
that you have to have very large boilers to operate
the concentrator because it requires a lot of steam.
So when he talked about leasing the winery and
agreed to move his concentrator there and take a
lease of the winery, I figured that that was tanta-
mount to a sale, because I didn't see how he could
afford to move all of that machinery or install all
of that machinery at the winery at Santa Rosa and
56 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
not buy the winery. The investment as I figured
would cost him $50,000. So that I felt that a lease
to him was tantamount to a sale of the winery to
him.
AVell, it went on for a while and he put in the
concentrator at Santa Rosa and he put in the hi"-
boilers. Then he said he thought he might like to
— ^there was a winery up the valley further in Men-
docino County that might suit him.
Q. At the time, just so we might have this in
chronological order here, at the time he discussed
with you the matter of leasing the winery, did you
also discuss with him the matter of purchasing the
wine and other assets?
A. Oh yes, he did. He said, ''I can give you
what you ask for your wine inventory and every-
thing that goes with it, the good will, which would
be equivalent to $250,000." He says, ''If I give
you 50 cents a gallon, that will give you what you
are asking."
And it give us, as a matter of fact, about $10,000
more than we were asking. So that I felt we were
getting the price that we were asking for the good
will, the organization and all that, which went over
to Mr. ^^eller later. We delivered him all those
intangibles, all the good will things we had in mind
— ^they were delivered to the Garrett people. [75]
Q. And did those negotiations result in the
agreement of January 20, 1943 ? A. It did.
Q. Between yourself and Garrett and Company?
A. That's right.
Commissioner of Internal Revenue 57
(Testimony of Joseph T. Grace.)
Q. And I might say that that agreement is
attached as an exhibit to the stipulation of facts.
When you conchided the negotiations, did yon
transfer to Garrett and Company your winery oi'-
ganization? A. We did.
Q. Employees? A. We did.
Q. After the negotiations were completed, just
what took place?
A. The key men — in a winery there are certain
departments to the winery — some men have to do
with the crushing of the grapes and the making of
the wine; other men have to do with the clarifying
of the wine and the storage of it and the bottling
of it. I am very sure that all of the organization,
all of the key men remained in and many of the
other men, but during the crushing season we lia^^e
a lot of what we call ''casual help" that come in
for maybe the vintage season of maybe three or
four weeks. Of course, they were gone, but the
real valuable men we had trained for many years
in the art of mne making, they remained with
Garrett.
The Court: Was that part of the agreement
that they were to remain or did they just remain ?
The Witness: No, that was part of the agree-
ment that we should do what was necessary to turn
them over. We talked to them and the men all de-
cided to remain with Garrett and Company. [76]
Q. (By Mr. Koster) : What happened to all of
the winery equipment and bottles and barrels and
labels ?
58 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
A. Well, the labels were taken over by Garrett
and Company. They were delivered to Garrett and
Company. The bottles, I don't know, for sure, T
think we, knowing of the sale, I think we had re-
duced our stock of bottles pretty well, but we turned
all of the labels over to Garrett and Company.
Q. Mr. Grace, what happened to it — what did
you do with respect to — how did you inform your
customers as to this transaction with Garrett and
Company ?
A. We informed the customers we had sold out
to Garrett and Company, and we asked them to
send their orders and to patronize Garrett and
Company.
Q. Now, when did the matter of the actual sale
of the winery plant first come into discussion?
A. You mean the winery, the building?
Q. As I understand it, Garrett and Company
leased the plant under the agreement of January
20. How long did they lease it?
A. They leased the plant and operated it for one
year, one season, and they — I think about 14
months, into April of the following year.
Q. What followed?
A. Mr. Weller came to me saying there was a
winery up country that might be better situated
for the needs of his business and would we release
him from the lease. I said, ''Well, Mr. Weller, if
we could sell the winery I think we would release
you. ' '
A short time after the Taylor people appeared.
Commissioner of Internal Revenue 59
(Testimony of Joseph T. Grace.)
within maybe a few weeks. The Taylor people ap-
peared and opened negotiations for the purchase
of the winery. [77]
The Court: Negotiations with you or with
Weller?
The Witness: With me.
Q. (By Mr. Koster) : And the stipulation shows
that the sale was concluded and Garrett and Com-
pany was released from the lease of 1944?
A. Right. That's right.
Q. Was there a demand for The DeTurk wines
in 1942 and 1943?
A. Oh, 3^es, our wines always have a good repu-
tation and it was in demand all over. We had
inquiries from all over the country for it.
Q. Mr. Grace, do you have any opinion as to
the value of the good will or the going concern
value of the DeTurk Winery business conducted
by Grace Bros., Inc., the value of those assets, in
January, 1943?
A. Well, the value of the winery for seven years
previously had made for us about $20,000 each year.
One year it made over $30,000. Then with the other
activities that we had there — if we had been able
to give more attention to the winery, we could have
made $30,000 a year. One year we made it and the
other seven years prior to the sale we averaged
a Uttle bit less than $20,000 for the year for the
seven years.
Based on that approximately $20,000, I figured
that it was worth five times that earning power.
60 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
The Court: Annual earning power?
The Witness: Annual earning power.
Q. (By Mr. Koster) : Do I understand you cor-
rectly? What was it that was worth five times the
earning power?
A. Well, I figured the good will. First there
was the — we turned over to Glarrett and Company
our permit to manufacture wine and our license to
sell it. We turned all of our rights over.
Then I consider that the reputation of the wine
that The BeTurk Winery had — I think then it was
valuable to have the wine identified under the De-
Turk label. Our organization was valuable. The
place in which to [78] do business was well equipped
and valuable.
Q. Would you state what, in your opinion, was
the value of the intangible or good will value of Th(^
DeTurk Winery business in January 1943 in
amoimt of money?
A. I would say $100,000, five times the earning
power, which would be $100,000.
Q. AYould you say there was any difference in
that value if you were to use as the valuation date
June 1942?
A. No. I think the values would be about the
sam(\ The conditions improved though about that
time. They were getting better, but they would
result in very little difference, I think.
Q. Just one more question: This DeTurk
Winei'v business was always located in Santa Rosa
and conducted from there, is that correct?
Commissioner of Internal Revenue 61
(Testimony of Joseph T. Grace.)
A. That's right.
Mr. Koster: That conchides the direct exami-
nation.
The Witness: In connection with that other
good will, I think the list of our customers and the
capacity to make money there entered into my idea
as to what went to make up the value of the good
will in addition to the reputation of the wine. Th.c
compan}^ was making $20,000 a year and the good
organization we had, that we had trained for many
years, all of that I felt was very valuable as well
as the opportunity for them to go on and make
their $20,000 a year.
We had a distillery there; we were making very
fine brandy.
Mr. Koster: Has the company at any time sincf>
then gone back into the business of making and
selling wines?
The Witness: No.
Mr. Koster: Have you personally gone into that
business %
The Witness: Of selling wines'? No. [79]
Cross Examination
Upon cross examination by Mr. McFarland, Mr.
Grace testified as follows:
Q. (By Mr. McFarland) : Mr. Grace, you sold
that winery plant in 1944 to Taylor and Company
for $150,000, didn't you? A. That's right.
Q. And the cost of that winery was $50,997.36.
Is that the way you computed the gain?
A. That was the depreciated cost.
62 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. That was the adjusted cost at the time you
sold and you realized a gain of $99,002.64?
A. I think that is correct. As to that, I haven't
the figures with me, but I think that is correct.
Q. That is the Avay you reported it for income
tax purposes.
There is no element of good will in that, would
there be? A. In the sale of the winery'?
Q. Yes. A. In the sale of the winery building ?
Q. Yes.
A. I considered there would be because it was
an established winery and a place to do business,
but I figured the good will to more on the wine in-
ventory and the buying and selling of the wine
than I did on the building.
Q. Well you said you valued the good will at
January 1, 1943 at $100,000.
A. That's right.
Q. Is that in addition to this good will that you
propose to find out? [80]
A. No, that would take in all of it I figured.
Q. That would take in the whole thing?
A. That is the way I figured the winery and the
wine business, the buying and making of wine, that
it should reasonably be worth $100,000.
Q. For the whole thing?
A. For the whole thing, that's right.
Q. Now you speak of turning over some per-
mits to manufacture some wine. That permit ap-
plies to manufacturing wine at the particular
winery, is that right? A. That's right.
Commissioner of Internal Revenue 63
(Testimony of Joseph T. Grace.)
Q. And whenever anyone in the State of Cali-
fornia at least turns over and transfers by sale or
otherwise a winery, the permit dies and a new one
has to be taken out by the new operator?
A. Well, that is true, but the new operator can't
get a permit unless the other fellow gets out of his
way and surrenders his rights. We had to surren-
der our rights before Garrett and Company could
get a permit to do business.
Q. What rights did you surrender?
A. We were operating the business and that was
one — we had the possession of it and we were op-
erating and Garrett and Company couldn't do busi-
ness there until we got out of it.
Q. In other words, you surrendered the posses-
sion in order to let them get in there to make some
wine ?
A. That is true, but they couldn't until we
turned over our rights to the permit.
Q. Your rights to the permit? How long were
your permits in effect when you turned over the
rights to make wine in that plant? [81]
A. Well, if the deal had not gone through, we
would still have had the permit to make wine, to
manufacture wine there.
Q. Surely, but in event the deal went through ?
A. That was part of the transaction. When we
made the deal with Garrett, we would turn over
our permit, make it possible for him to get the per-
mit to make wine.
64 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. Presumably Garrett and Company would not
have any interest in the lease of the winery unless
they could make some wine in there, would they?
A. That is true, that is true; but they couldn't
get the permit until we turned our rights over,
which we had there.
In 1943 I was President and director of Joseph
T. Grace Farms, Inc. I was the majority stock-
holder. The Farms Co. grew very few grapes.
Grace Bros., Inc. grew the grapes. The products
of the Farms Co. were mostly hops and grain but not
any grapes. Grace Bros., Inc. grew some grapes in
1942 and I think they grew some grapes in 1943 and
1944. They have grown grapes for a number of
years. I don't recall now when they first started
growing grapes but it was several years previous to
1942, at least as early as 1940 and maybe a few
years earlier. They have grown grapes since 1940
and each year thereafter. We made the grapes into
wine when we operated the winery and sold them
to Garrett and Co. after they took over. Now we
sell the grapes to different wineries.
Q. Now we will take the Grace Bros. Brewing
Company of Los Angeles. What is the comiection
as to the ownership of stock between that company
and the Petitioner? Any connection?
A. Not at the present time. [82]
Q. In 1943 ? All my questions are asked in con-
nection with that year.
A. In 1943. I don't think there was any Grace
Bros., Inc., ownership there in 1943.
Commissioner of Internal Revenue 65
(Testimony of Joseph T. Grace.)
Q. Did you own stock?
A. Wait a minute — I wouldn't be so sure of
that. We have several companies. I wouldn't ])e
sure about that. Yes, I think Grace Bros., Inc., in
1943 and since owned stock in the Grace Bros.
Brewery, Ltd., in Los Angeles.
Q. You have always owned stock in that com-
pany, haven't you?
A. Up to a great many years.
Q. I am talking about you personally.
A. Personally I sold some stock. I did for a
whi](\ I think the Grace Bros., Inc. at the present
time owns most of the stock of Grace Bros. Brewery
Ltd., in Los Angeles.
Q. Directing your attention to January of 1943
and December of 1942, what is the fact as to your
own personal stock ownership of Grace Bros.
Brewery, Ltd. at Los Angeles?
A. In — you mean at the present time?
Q. During December of 1942 and January of
1943.
A. I think in 1943 Grace Bros. Brewery, Ltd.,
owned practically all of the stock in the Grace
Bros. Brewery, Ltd.
Q. Grace Bros. Inc., owned?
A. That's right. Owned practically all of the
stock of the Grace Bros. Brewery, Ltd., in Los
Angeles.
In 1942 I think I owned about two-thirds of that
stock individually.
Q. Now the Buffalo Brewing Company — what is
66 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
the fact as to that company in 1942 and 1943 — as to
stock ownership in it? [83]
A. Well, that stock is owned — I am the largest
stockholder there. M}^ daughter owns some of that
and I think, well, Mrs. Grace might have a small
lot of it, but my daughter and I own most of it and
T own most of the Buffalo stock.
Q. Do you or does Grace Bros., Inc., operate a
Fresno Brewing Company?
A. Grace Bros., Inc.
Q. It operated that in 1942 and 1943?
A. Not in '42. It was purchased by Grace Bros.
Brewing Company in 1942 and Grace Bros, has op-
erated it since then.
Q. Is it a fact that in all of these other com-
panies that counsel inquired of you, on your direct
examination, that you or Grace Bros., Inc., own the
majority or all of the stock in them and did in 1942
and 1943 for all practical purposes? I don't expect
you to remember each exact share.
A. I don't remember each one of them. It's a
difficult thing. I have a lot to attend to, but I
owned most of the stock. Grace Bros., Inc., owned,
I think, all of the stock in the Los Angeles Brewery.
I think that I own a part of the Buffalo stock with
my daughter. That is my recollection. The Fresno
Brewing Company is owned by Grace Bros., Inc.
The California Ice Co. is owned jointly by myself
and my daughter. I am a director of Bay Cities
but I don't own any stock. That is owned by my
Commissioner of Internal Itevenue 67
(Testimony of Joseph T. Grace.)
daughter and her children. Santa Rosa Ice and
Cold Storage Co. is owned by Grace Bros., Inc.
Q. (By Mr. McFarland) : You were active and
you i^erformed duties regularly — maybe not daily
but certainly at periodic intervals, in all of these
companies? A. Yes, sir. Too much so.
Q. That kept you pretty busy? [84]
A. That is the reason I got out of the wine
business.
Q. You knew you had to get out of something?
A. I knew I had too much work to do.
Q. I believe as to actual facts as to the way the
sale of the wine worked, there was a certain pay-
ment made by Garrett and Company to Grace Bros,
in 1942, wasn't that right?
A. I think that's right.
Q. Grace Bros. Inc., filed an income tax return
in 1942, didn't they? A. I think so.
Q. Do you recollect how and in what manner
that payment was treated, as to whether it was
treated as just the sale of wine?
A. I don't recall just what that is. That is a
long time ago and with all these companies I have
told you of, I can't remember. The income tax man
is in the Court. He could tell you. I don't follow
those things myself.
Q. You wouldn't know if I referred you to the
returns? A. I would not, sir.
Q. AVho is that gentleman?
A. The gentleman sitting in the corner.
68 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. He would know how he accounted for the
proceeds of the sale?
A. I think he would. I don't know myself.
Q. Does Grrace Bros. Inc., hold regularly sched-
uled meetings of the Board of Directors?
A. Well, we hold meetings occasionally.
Q. None of these considerations that you have
testified to as to the desire to dispose of your winery
ever reached written form in the nature of minutes,
did they? [85]
A. I don't recall, sir, about that. I know it was
the general decision that we should get out of the
wine business.
Q. Who makes that decision?
A. I am largely responsible for those decisions.
These different companies and things — we have
been engaged in business up there for many years,
for 50 years nearly, and these companies have
grown up and largely around through our own
efforts. The decisions on these things largely rested
with me, though.
Q. Who comprised the Board of Directors of
Grace Bros., Inc., in 1942?
A. I think Mrs. Grace and Mr. Kadan and my-
self.
Q. Did Mrs. Grace own stock in Grace Bros.,
Inc., at that time? A. I think she did.
Q. How many shares of stock did she own?
A. Well, Mrs. Grace had at least the qualifying
7 111 ruber of shares, but she had some other stock she
was going to buy, quite a substantial amount of it.
Commissioner of Intemal Revenue ()9
(Testimony of Joseph T. Grace.)
but for some reason or other Mrs. Grace didn't
want to conclude the purchase. So the stock was
undelivered and I still own most of the stock in
Grace Bros., Inc.
Q. How many shares are authorized to be
issued? A. I think a thousand.
Q. How many have been issued?
A. I think a thousand; originally there were
2,000 and on the death of my brother in 1930 the
stock issue was reduced from 2,000 shares to 1,000
shares.
Q. How many shares did you hold in 1942, dur-
ing- 1942?
A. I held practically all of it outside of what
arrangement Mrs. Grace was going to buy and then
Mrs. Grace didn't conclude. She changed her mind
about what she wanted to buy. [86]
Q. The deal fell through?
A. The deal fell through. I still own the stock.
Q. Did Mr. Kadan hold a qualifying nmnber of
shares? A. That's right.
Q. Ho never held more than that at any time?
A. ¥o.
Q. You own 99 percent of the stock?
A. T think so.
Q. You ran the company?
A. That is correct.
Q. You might have told them on certain decisions,
what the facts were, and maybe you didn't, too?
A. No. We discussed things pretty well back
70 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
and forth on that. But we have been operating
together for a good many years and we're still get-
ting along all right.
Thereupon the following telegrams were offered
and received in evidence as respondent's Exhibit I.
First telegram, dated December 28, 1942, to
Joseph T. Grace at Santa Rosa, California from
Garrett and Co., Inc.
Second telegram, dated December 28, 1942, ad-
dressed to Garrett and Co., Brooklyn, N. Y. from
Mr. Grace.
Third telegram, dated December 28, 1942, ad-
dressed to Garrett and Co., Inc. at Brooklyn, signed
by Joseph T. Grace.
Fourth telegram, dated December 29, 1942, ad-
dressed to Joseph T. Grace, Santa Rosa, California
from Garrett and Co.
Fifth telegram, dated December 29, 1942, ad-
dressed to Garrett and Co. at Brooklyn, N. Y. from
Joseph T. Grace. [87]
Sixth telegram, dated December 30, 1942, ad-
dressed to Joseph T. Grace from Garrett and Co.,
Inc.
Seventh telegram, dated December 31, 1942, ad-
dressed to Joseph T. Grace from Garrett and Co.,
Inc.
Eighth telegram, dated January 1, 1943, ad-
dressed to Garrett and Co. by Joseph T. Grace.
Ninth telegram, dated January 2, 1943, addressed
to Joseph T. Grace from Garrett and Co.
Commissioner of Internal Revenue 71
(Testimony of Joseph T. Grace.)
Q. (By Mr. McFarland) : Mr. Grace, these tel-
egrams are arranged to the best of my ability in
chronological order. A. Yes.
Q. Let us take up the telegram of December 28,
1942. Would you read that?
The Court : Is that the first of the series ?
Mr. McFarland : That is the first of the series.
A. It was a telegram from New York to me:
''Roy Weller is here and hears you are interested
in selling your inventory and leasing winery for a
term of years. If so, please give us details. "Would
also appreciate it if you will hold matter open until
wo can consider it."
Q. (By Mr. McFarland) : The next telegram is
dated December 28, 1942. Would you read that
telegram ?
A. "Telegram received. Please advise Roy Wel-
ler that we have several purchasers — "
Q. Pardon me. That telegram was sent by you,
is that correct?
A. That's right. It is the one I am going to
read now. [88]
Q. Yes.
A. "Telegram received. Please advise Roy Wel-
ler that we have several purchasers for our inven-
tory and lease of winery and distillery. Also bonded
warehouse. Stop. Inventory consists: Dry red
mostly from Zinfandel and Petitsyrah 1940 vintage
180,000 gallons, 1937 vintage 5,000, 1939 vintage,
5,000, same kind black grapes. Price for all forty
72 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
cents per gallon. Stop. About 80,000 gallons diy
white wine practically all from Northern white
grapes made up as follows: About 15,000 gallons
1937 vintage, sixty five cents per gallon. About
260,000 gallons sweet wine made up of port, about
40,000 gallons vintage 1935-1941. Muscat, about
120,000 gallons all from 1935 and 1938 vintage.
Sherry about 70,000 gallons 1935 and 1938 vintage.
About 20,000 gallons Angelica 1938, 1939 and 1941
vintage. Sixty five cents for all sweets. Stop.
Lease of winery, distillery and bonded warehouse
$12,000 per year for five years. Stop. Please tele-
graph by Western Union Tuesday morning early if
you are interested. Stop. Would prefer doiu<?
business with your company if possible as other
prospective purchasers are strangers but have good
financial recommendation. This is not an offer to
sell to you, only an indication of position. Happy
New Year."
Now, may I remark something about this tele-
gram, sir?
Q. Probably we w^ould expedite the matter, Mr.
Grace, by not doing so, because I know Mr. Koster
will undoubtedly ask you questions.
A. All right. All right.
The next one is to Garrett and Company signed
by me:
''Can probably add 100,000 gallons port and 100,-
000 gallons muscat both 1940 vintage to inventory
in my telegram today at 60 cents. Answer immedi-
Commissioner of Internal Revenue 73
(Testimony of Joseph T. Grace.)
ately by Western Union if interested. Can sell to
other parties." [89]
The next telegram, December 29, 1942:
*^ Situation with reference transportation which
has arisen since our wire of yesterday makes us
hesitate take on wine listed in your wire. How-
ever we might be interested in portion of inventory
if you cared to dispose of part. Thanks for wire
and best wishes for new year."
Next wire, to Garrett and Co., sent by me :
"Your wire reed. What part of inventory are
you interested in. Stop. What are your ideas on
rental of plant. Stop. Anxious to close deal imme-
diately to get part of sales in this year income tax
returns. Answer by WU care St. Francis Hotel."
December 30, a wire from Garrett and Co.:
"Weller and Moore out of city returning tomor-
row and will then wire definitely regarding inven-
tory and rental of plant."
Q. That is signed by Garrett and Company?
A. That is signed by Garrett and Company.
The next, dated December 31, 1942, signed by
Garrett and Company:
''Confirming our telephone agreement relative to
lease of winery and purchase of bulk wines as fol-
lows ..."
There have been many telephones in between these
and I feel that would change the complexion of
these telegrams a lot.
Q. Will you read that? A. Yes.
74 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
''. . . We lease your winery located at Santa
Rosa, California as of January First 1943 for a
period of five years with an option on our part for
a five year renewal at an annual rental of ten thou-
sand dollars. We purchase approximately 520,000
gallons of bulk wine as set forth in your telegram
of December 28th at an average unit price of fifty
cents [90] per gallon naked FOB Santa Rosa, Cali-
fornia, if found to conform to California State
Standards. A deposit of 20% of purchase price
of wine to be paid you at once and held by you to
apply as payment for final shipments. Individual
payments to be made on each car of wine as sliip]:)ed
until deposit can be applied. Further understood
that entire agreement as outlined above is subject
to immediate cancellation as to lease or purchase
of any wine remaining unshipped in event tank cars
cannot be secured for movement to Brookljm, New
York."
That wasn't agreed to. That was stricken out.
Q. That is in addition, Mr. Grace. We're get-
ting ahead of ourselves. It is in the telegram.
A. Yes, it was in the deal, but after it was taken
out.
"Other necessary details and final signing of
agreement will be completed upon arrival of Ti A
Weller in California about January 20."
January 1, telegram from me:
"Accept your proposition in telegram dated De-
cember 31st. My understanding from phone con-
Commissioner of Internal Revenue 75
(Testimony of Joseph T. Grace.)
versation was that you would start shipments of
wines in the near future and that you would move
all of same in a reasonable time. Stop. We have
several hundred wine barrels which other wineries
have made proposition to purchase. Do you think
it advisable to hold these barrels for your possible
Eastern shipments in event tank cars become scarce.
Stop. Have billed you for a portion of the inven-
tory to get same in last years business for income
tax purposes. Stop. If convenient please mail
check for deposit as mentioned your telegram De-
cember thirty-first. Wine inventory and winery's
property are free of all debt. Stop. Note your Mr.
Weller will arrive California about January twen-
tieth [91] to sign wine agreement and lease. Stoj).
Rest assured that I will do everything possible to
assist your organization in making success of your
program here. Stop. Happy New Year.''
Signed by Joseph T. Grace.
Then the telegram dated January second from
Garrett and Company, Incorporated, to me:
"Mailing you check today for fifty- two thousand
dollars covering initial deposit. Please hold wine
barrels as possibility we might need them. Weller
will discuss with you upon arrival. Our intention
move wine East as fast as tank cars can be securc^d
for movement."
Q. Now, Mr. Grace, referring for the moment
to your direct testimony, I believe that you stated
that you desired to get out of the winery business in
1942, is that right? A. That's right.
76 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. What influenced you other than what you
have already testified to, namely, your preoccupa-
tion with other activities in which you or Grace
Bros., Inc., were busily engaged? What influenced
you to arrive at this decision?
A. Oh, I think it was likely a little too much
work and too much activity.
Q. There was a shortage of tank cars in 1942?
A. They were becoming scarce. It never devel-
oped into a shortage.
Q. At that time, everybody was apprehensive
about the situation?
A. Not particularly so. I told Weller after this
telegram here which refers to the tank car shortage
that we wouldn't make a deal with him on that
basis and he said, ''Well, take that out." This he
did. He wasn't very apprehensive about it. [92]
Q. The price of wine was going up those years,
wasn't it?
A. Well, it was improving. There was a better
feeling for it.
Q. Bid the OPA price ceilings or any restric-
tions on it have anything to do with the difficulty of
conducting business that would make it desirable
for somebody managing it to go out of business,
forget the whole thing?
A. No, I don't think so. I don't think we ever
had any difficulty on that,
Q. How many key men did you consider that you
had in 1942 in your organization?
Commissioner of Internal Revenue 77
(Testimony of Joseph T. Grace.)
A. Well, let me see. There was one — Oh, I'd
say three or four key men.
Q. How many men did you have in the organi-
zation — I am not talking about the season.
A. Not in the crushing season — in the ordinary
work I would say about eight, maybe ten, and dur-
ing the vintage when we were crushing grapes, we
would have maybe three times, two or three times
that.
Q. Mr. Grace, in arriving at your valuation of
your intangible or good will inherent in this sales
price, you stated that you roughly estimated five
times the average earnings over a period of years
as being representative of that figure, is that cor-
rect? A. That is correct.
Q. Why did you adopt that formula or how did
you come to use that formula?
A. Well, in my banking experience, why the
earnings of a business per year — we have used that
formula at diiferent times. [93]
Q. You have used that formula in evaluating a
credit risk in your bank?
A. Yes. The average earnings of a business
annually has to do with the value of it. That is
the way I have always figured it.
Q. And you have drawn upon your experience
as an advisor to the Santa Rosa Bank of America
Branch, is that right?
A. Well, my experience when I was in charge
of the banks up there and since then, yes.
78 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. Your experience consisted mainly of evaluat-
ing, determining whether or not this particular
applicant would be a good risk or the corporation
in large part, at least?
A. Well, of course the business had to have the
earning power in order to repay the loan. That
always entered into it.
Q. That was one of the factors?
A. That was one of the factors.
Q. And the other facts would be the normal fac-
tor in determining whether it was a good risk oi'
not, is that right?
A. The other factors would involve the repu-
tation of the men in charge of the business and their
qualifications for operating the particular business
in which they were engaged.
Q. But my point is you were approaching the
problem at that time from the Bank viewpoint in
determining whether or not to extend credit to a
particular applicant.
A. That is the way I would figure. That is the
way T would ascertain it. Good will value or the
earning value would be as to what the business was
making each year, the annual earnings. [94]
Q. Now will you answer my question?
When you were with the Bank of America, busy
with that particular problem, namely, determining
whether or not a particular applicant was an ac-
cei)table credit risk, you took into consideration va-
rious factors that anyone would in determining
upon the credit risk?
Commissioner of Internal Revemte 79
(Testimony of Joseph T. Grace.)
A. Yes. But I had other duties in addition to
that to perform. That was not my only duty.
Q. That was your main duty?
A. No. I wouldn't say it was the main duty. I
had other duties that I consider equally as im-
portant.
Q. What else did you do?
A. I had supervision of the branches, the heliD,
and —
Q. When you say ''supervision" over the person-
nel, what do you mean ? A. I had charge of —
Q. The personnel, is that it?
A. Yes. I consider I was in charge of the per-
sorniel.
Q. Yes.
It is my understanding l:>y the way Mr. Weller,
whom we have referred to and who is an official of
Garrett and Company, is now deceased?
A. I understand so.
Q. Yes.
What is your recollection as to the average capi-
tal investment of Grace Bros., Inc., over the years
1936 to 1942?
A. You mean in all of the businesses ?
Q. Yes.
A. In all of our different lines? [95]
Q. In this particular business.
A. In the wine business?
Q. Yes.
A. I think the winery showed after depreciation
about $60,000 and I think the investment in the wine
80 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
inventory, after depreciation and cost, figured some-
where around $90,000, if I am correct.
Q. Yes.
In connection with this decision that you claim
to have made in the early part of 1942 relative to
your winery and your wine business, did any of it
ever find expression on any written document or
any paper that you know of, belonging to the Com-
pany, in the form of a resolution or a minute or
communication or a memorandum?
A. I don't recall as to whether or not our min-
utes show anything on that or not.
Q. You have checked your minutes recently,
haven't you? A. No, I haven't.
Mr. McFarland: Do you have the Minute Book
here, Mr. Koster?
Mr. Koster : Government counsel and I examined
the Minute Book and there is nothing concerning
this in it.
Q. (By Mr. McFarland) : There would be no
other place where a memorandum would be avail-
able that would shed any light on this?
A. No. I don't think so, Mr. McFarland.
Q. None of this ever reached paper?
A. That is a decision to go out of the wine busi-
ness?
Q. Or any of the considerations or discussions
that you had with anyone or your ideas or your
reasons — none of it ever reached paper?
A. I don't think so. I was the Executive officer
Commissioner of Internal Revenue 81
(Testimony of Joseph T. Grace.)
and largely made those plans myself. But I don't
know of them ever reaching paper. [96]
Q. You wrote the memorandum of agreement
and lease that you composed in the form of a letter
to Garrett and Company, did you not?
A. I don't think I did. I don't recall of doing so.
Q. This is a photostatic copy. It is attached to
the stipulation of facts.
A. Well, it was not prepared by me. It might
have been prepared by our attorney. I am sure I
didn't prepare it.
Q. You signed it. You signed the original. You
read it over, didn't you?
A. No — well, I must have before I signed it. I
haven't read it recently.
Q. What is said in there certainly at the time
you read it over and signed it was true or in ac-
cordance with your decisions in the matter, in ac-
cordance \^ith your ideas?
A. Well, I presume it must have been or I
wouldn't have signed it.
Q. Surely. That is all I was asking, Mr. Grace.
Redirect Examination
Upon redirect examination by Mr. Koster, Mr.
Grace testified as follows:
I don't know the date of Mr. Welter's death but
I think it was about a year ago. That is as close as
I can figure.
Q. (By Mr. Koster) : Mr. Grace, I am showing
you Defendant's Exhibit I which is a group of
telegrams, and I call your attention to the first tele-
82 Grace Bros., Inc., vs.
('restimony of Joseph T. Grace.)
gram which is addressed to you by Garrett and
Company, Inc., and it is dated December 28, 1942.
I ask you whether or not your conferences with
Mr. Weller in Fresno, to which you have testified
to on direct examination, occurred prior to that
date? [97]
A. Yes, they did. The conference was prior to
this date of December 28.
Q. Did you consider that this telegram related
to that conference?
A. Well, when I talked with Mr. Weller there,
he indicated that Garrett and Company might be
interested in leasing the winery and in paying the
price to us for the wine that would meet the price
we asked for the wine business. Then w^hen I re-
ceived this, he said he would see his peoj^le when
he went East, and then this telegram was construed
by me to be that they were interested in the deal
because it was some time prior to this time that we
held that conversation.
Q. I call your attention, Mr. Grace, to the second
telegram which is sent by you, addressed to Garrett
and Company, Inc., and I ask you if there was any
particular reason for the context of that telegram
in the manner in which it was composed?
Mr. McFarland: Is this the telegram dated De-
cember 28th, Mr. Koster ?
Mr. Koster: December 29, it appears. Well, I
suppose it was sent on the 28th. It was a Night
Letter and seems to be a December 29 date on it
Commissioner of Internal Revenue 83
(Testimony of Joseph T. Grace.)
also. It is the second telegram in the group of tele-
grams made a part of that exhibit.
A. Well, this telegram was simply a listing of
the wines, of the wine inventory that we had for
sale. These j^rices that I asked Garrett and Com-
pany, they would have given us a little bit more for
the wine and the good will than what we eventually
received. It was just a listing of the vmies, and I
asked him — I thought that Garrett might jjay these
prices on account of the interest evidenced in previ-
ous meetings. If he had, I of course would have re-
ceived a little more on these prices than eventually
on the wine and good will, than we eventually re-
ceived. [98]
The Court: Those prices fluctuated with refer-
ence to different types of wine, whereas your talk
with him was a flat price on all wines?
The Witness: Well, the flat price for the wine
originally — I told him we wanted $250,000 for the
wine inventory and the good will. Then there was
some request made for an inventory or a listing of
the winery, the wine stock, and these prices. Your
Honor, would have figured a little bit more than
1250,000.
The Court: I understood yesterday that you fig-
ured you got about 50 cents and that probably was
a little bit more. Most of that is above 50 cents.
The Witness : This would be above 50 cents ; this
would give us more than 50 cents by a little bit
more than $30,000.
Q. (By Mr. Koster) : Was this in line with your
84 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
conversation with Mr. Weller at the conference in
Fresno to which you testified?
A. Well, these prices are a little higher and it is
the same wine though that we offered to sell him.
But I asked him at first — I indicated that we
wanted $250,000 for the stock and the wine and the
good will and this that we have presented and
itemized would have figured up a little more than
$250,000.
Q. I see.
The Court : Pardon me. Where is the headquar-
ters of this company that is buying the wine? Is
that in New York?
Mr. McFarland : Brooklyn, New York.
The Witness: And they have a place in Cuca-
monga, in Southern California.
Q. (By Mr. Koster) : I call your attention to the
wire dated December 29, 1942, a day letter signed
by Garrett and Company, and addressed [99] to
you, in which reference is made to possible shortage
of transportation and a request of you whether you
would be interested in selling a portion of your in-
ventory. I also call your attention to your reply to
that wire by wire dated the same day, December 29,
in which you make an inquiry of them of what part
of the inventory they might be interested in and
that you would like to have the matter closed so you
could have it in your income tax returns for 1942.
Was there any reply received to your answer, or
was there any further steps towards developing the
matter of selling the inventory in part?
Commissioner of Internal Revenue 85
(Testimony of Joseph T. Grace.)
A. I told him that we would not sell a part of
the inventory.
Q. When did you tell them that?
A. Well, I think that must have been about the
time or the day, either the day or the day after,
that we received the wire, that we would not be
interested.
The Court: Is there a telegram to that effect?
Mr. Koster : I will follow that up, Your Honor.
Q. (By Mr. Koster) : Now I call your attention
to the final wire or the next to the last wire, dated
December 31, 1942, addressed to you by Garrett and
Company. I notice that wire starts off with the
words, "Confirming our telephone agreement * * *"
Is that the telephone call in which you discussed the
matter of selling partial inventory?
A. Yes. I am quite sure it is because it was the
following day and I told them in that telegram we
would not be selling —
Q. Telephone call?
A. Telephone call, that we would not be inter-
ested in selling a part of the inventory. They in-
dicated that they would consider that, and then
[100] later on they agreed to take all the wine. They
sent us a telegram they would ship all of the wine,
as I recall.
Q. Now before we get to that, and calling your
attention again to this wire of December 31 which
I wish you would read — and I call your attention
especially to a provision in that telegram concern-
ing possible cancellation.
86 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
A. I told them on the phone that we would not
agree to any cancellation of part of the deal. The
deal was that they would have to bu}^ it all or noth-
ing and that there would be no cancellation clause
considered.
Q. And what did they say to that ?
A. They answered, then, I think, either the same
day or the day after, that they would ship all of the
wine, which they did.
Q. Did you confirm this agreement or the agree-
ment that was made over the telephone*?
A. I did.
Q. And now I call your attention to the wire
dated January 1, signed by you, and addressed to
Garrett and Company, Inc., in which it is stated
"Accept your proposition in telegram dated Decem-
ber 31st. My understanding from phone conversa-
tion was that you would start shipments of wines
in the near future and that you would move all of
same in a reasonable time Stop."
Is the telephone call referred to in that telegram
the telephone call to which you have just testified
concerning the removal of all cancellation pro-
visions? A. That's right.
Mr. Koster: Your Honor, I omitted to ask one
question on direct examination and I would like to
just ask this question, if you please. [101]
Q. (By Mr. Koster): Mr. Grace, there is at-
tached to the stipulation of facts in this proceeding
as Exhibit 4-D a statement of the earnings of the
DeTurk Winery for the years 1936 to 1942 inclu-
Commissioner of Internal lievenae 87
(Testimony of Joseph T. Grace.)
sive. I note from that statement that the income
for the years '39, '40 and '41 was lower than in any
of the other years.
I ask you whether there is any particular reason
why the income in those years was lower than in
the other years?
A. Well, the wine business in those years was
not as good as in the previous years or in the later
— well, the previous years. It was those years where
the prices were down and a little bit lower, maybe,
and the wine trade was quiet.
Mr. Koster: That is all.
Recross Examination
Upon recross examination by Mr. McFarland,
Mr. Grace testified as follows:
Q. (By Mr. McFarland) : Mr. Grace, I would
like you to take your telegram that you sent to Gar-
rett and Company, dated December 28, and your
telegram, your second telegram, dated December 28,
and compute for me on the basis of the prices that
you have mentioned of the various wines that were
in the inventory, your formula for five times the
earnings of the business. I would like to see how
you work it, either way.
A. Well, let me see. I don't understand your
question.
Q. You have enumerated various prices for dif-
ferent kinds of wine in your inventory in those two
telegrams. A. That's right.
Q. Now I want you to compute for me on the
basis of those telegrams the value of the good will
8S Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
and the intangibles that you claim were sold to Gar-
rett and Company on the basis of those telegrams.
A. I don't see where these telegrams would have
any connection.
Q. I am just asking you the question. Can you
do it?
A. Well, I think I testified that my computa-
tion —
Mr. McFarland: I think the answer should be
responsive to the question or he should state that he
can't do it.
The Court : The witness will answer the question
as he understands the question, as he knows the
answer to be correct, whatever it might be.
Repeat the question and let him answer it, Mr.
McFarland.
Q. (By Mr. McFarland) : I would like you to
compute for me the intangible value that you claim
was transferred by the sale of this wine to Garrett
and Company upon the basis of the prices that you
have set forth relative to the various types of wine
that were in your inventory at the time you sold
that inventory to Garrett and Company.
A. Well, I computed the good will value on the
basis of the business the winery had been doing for
five years, for seven years.
Q. Mr. Grace, can you compute the good will
value on the basis of those telegrams?
A. On the basis — the good will value on this par-
ticular transaction (is that correct?) that would be
most difficult to do. It is only a portion of a year ;
Commissioner of Internal Revenue 89
(Testimony of Joseph T. Grace.)
it is only a part of the time. The good will value —
Q. I am just asking you, Mr. Grace, if you can
compute the good will on the basis of the prices
mentioned in those telegrams.
Mr. McFarland: If the Court please, that doesn't
appear to be a difficult question.
The Court : He answers according to the way he
understands it. [103]
A. I computed the good will value of the winery
business thereon the profits that the winery business
had made for the seven preceding years, which was
approximately $20,000 a year.
Q. (By Mr. McFarland) : Then if I understand
you first, Mr. Grace, you can't compute it on the
basis that I ask?
A. I suppose as a mathematical proposition it
could be done in some way, but it would require a
lot of time.
Q. You didn't do it in that way?
A. No. I computed it, the good will value, on
the profit that the winery business had made for
seven preceding years.
Q. Then am I correct in stating that you de-
termined the prices that you would sell the various
types of wine at with the idea in mind of having
the prices average roughly 50 cents per gallon. Is
that right?
A. These prices that you speak of, Mr. McFar-
land, I think would give us about $30,000 more than
50 cents per gallon.
90 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
Q. But that was roughly what you were shoot-
ing at?
A. I asked Mr. Weller for the $250,000 which
included the good will, and I figured that I could
get out of the wines as w^e were selling them, about
$150,000, and I asked $250,000 because I figured
that the good will value in there was worth $100,000
and that was five times the approximate earnings of
the previous year.
Q. And you got the $100,000 on the sale of the
plant subsequently, did you not? You realized a
hundred thousand dollars on the sale of your
winery ?
A. I don't know just how that would figure out.
Q. We went over that yesterday, don't you re-
collect, Mr. Grace? [104]
A. That would be only a part. The profit off the
winery would only be a part because there was the
organization, and a lot of other attributes in there,
but as to just what we made on the winery sales, I
don't know what the computation would show.
Q. You made $99,002.64 on the winery sales?
A. That might be, and I don't know that and I
didn't figure that in the $100,000 that I figured the
good will. That would only be a part. The profit
we made on the wine would be only a part because
I figured in that valuation for the good will of
$100,000, I figured the reputation of the wines, the
wines under The DeTurk label and the organization,
these men that we had trained for years to make
this wine. I figured our customer list, the people to
Commissioner of Internal Revenue 91
(Testimony of Joseph T. Grace.)
whom we sold the wine. I figured the capacity of
this business to make money. That is what I figured
for the $100,000.
Now what we made a year or so later on the sale
of the wine I have never checked into that.
Q. You wouldn't say this is incorrect?
A. I wouldn't say it is incorrect. It might be
correct, but I have never checked in to see the de-
preciated value of the winery.
Q. As a matter of fact, Mr. Grace, you have
stipulated that this is correct. Your counsel has
stipulated.
A. If we have, it must be correct.
Q. Will we agree it is correct?
A. I -can't agree to that. I don't know, but if it
is stipulated, it must have been our income tax man
who furnished these figures. But I haven't my per-
sonal knowledge it is correct.
Q. Tell me why did you sell the plant for $150,-
000?
A. Well, I thought we could get it. [105]
Q. How did you arrive at that figure?
A. How did I arrive at that figure? I think
there might have been some other wineries sold or
I think this man came along, I forget just how this
thing came up, but we asked $150,000 and he said
he would pay it.
I might have taken a little less, but he paid the
price I asked.
Q. And you had the depreciated cost in that
winery of $50,000 roughly?
92 Grace Bros., Inc., vs.
(Testimony of Joseph T. Grace.)
A. I don't know. That might be correct, sir, but
I don't know.
Q. No other considerations other than what the
fellow said he would pay?
A. He wanted the winery and he asked me what
I would take for it or what we would sell it for and
I told him $150,000.
Q. How did you compute that figure ?
A. I thought that was worth that. I thought we
could get it and like anything you have to sell, you
will sometimes ask a pretty good price.
Q. And take less, is that right?
A. Well, maybe take less. That is true.
Q. You didn't compute mathematically or take
anything into consideration other than just what
you thought he would pay?
A. That is about it.
Q. Garrett and Company never put out wine
under The DeTurk label, did they ?
A. I don't know.
Mr. McFarland: I believe that is all.
Further Redirect Examination
Upon further redirect examination by Mr. Koster,
Mr. Grace testified as follows: [106]
Q. (By Mr. Koster) : You testified to direct ex-
amination that when you met Mr. Weller in Fresno
you asked a price of $375,000 for the business, which
included $125,000 for the winery and $250,000 for
the inventory and the business. Is that correct un-
derstanding ?
A. Yes, that is correct. $125,000 for the winery
Commissioner of Internal Revenue 93
(Testimony of Joseph T. Grace.)
and $250,000 for the wine inventory and the good
will, making $375,000.
Mr. Koster : That is all.
There being no further questions the witness w^as
excused.
Thereupon,
JESSE TAPP
was called as a witness for and on behalf of the
petitioner and first having been sworn was exam-
ined and testified as follows:
Direct Examination
By Mr. Koster:
My name is J. W. Tapp. My business address is
300 Montgomery Street. My home address is Palo
Alto. I am employed by Bank of America as Vice-
President and a member of the Greneral Finance
Committee. At the present time that Bank is the
largest in the United States. I was first employed
by the Bank in 1939. In April 1943 I took leave
of absence and was for three months associated mth
the War Food Administrator and then from July
1943 until April 1945, President of Axton-Fisher
Tobacco Co., Kentucky. In April 1945 I returned
to the Bank in my present capacity. The Axton-
Fisiher Co. manufactures cigarettes. The company
bad a>^-T)roximately $22,000,000 in total assets and
wns doins: a gross business of about $10,000,000 a
yea 7". I was actively working as an executive offi-
cer of that company during the period mentioned .
In my position with Bank of America my special
94 Grace Bros., Inc., vs.
(Testimony of Jesse Tapp.)
field is in connection with loans to agriculture and
to the processing industries such as canners, dried
fruit packers, wineries, other agricultural process-
ing industries, although as a member of the General
Finance Committee I have to be interested in all
the credits of the bank. In my position I have re-
viewed or passed upon many millions of dollars of
loans. Most of the loans to wineries of California
which we handle, which is a considerable portion
of them, go over my desk and I have considerable
responsibility in connection with those. In addi-
tion, because of my previous experience with the
Department of Agriculture, I have worked rather
closely with the grape producing groups and
wineries and raisin packers, in connection with
their various marketing problems. We have made
very extensive loans to the grape producing indus-
try, to the raisin packing industry, to the shippers
and to the wineries, both in the form of open credits
on wine, raisins, or other products. In 1939 through
1941 we had a very large loan in connection with
the RFC and some of the other banks to the wine
industry as a whole, involving primarily California
brandy. This brandy was made in connection with
the diversion of surplus grapes to try to improve
the situation in 1938, 1939 and 1940. In extending
our credits, of course, we kept a rather complete
financial file of all of our borrowers or those who
had been borrowers and some who may be bor-
rowers which we are quite familiar with and which
Commissioner of Internal Revenue 95
(Testimony of Jesse Tapp.)
we have to study as these credits come up from
time to time.
Q. (By Mr. Koster) : In making an analysis
of credits and credit risks, did you at any time make
any determination or give any consideration to the
going concern vakie or intangible asset vahie of
businesses engaged in the wine and grape industry?
A. Yes, in connection with a great many of
them of going concern vahie, reputation, trade
marks, and position in the trade, which is of vahie.
Q. Have you ever engaged in any business trans-
action in which you negotiated for the disposition
of intangible or good will value of any business
concern ?
A. In connection with the Axton-Fisher To-
bacco Company, that company was dissolved in
1944 and I had the responsibility of negotiating the
sale of the plant and brands, trade marks, assets,
physical assets, inventory, etc., to another concern.
Q. In the matter of analyzing risks for unse-
cured loans, have you at any time made any deter-
mination of value for the members of the grape
and wine industry as to intangible or good will
values ?
A. Well, we have considered that. I wouldn't
say we have made a determination, but in our con-
sideration of the credits we naturally gave consid-
eration to the ability of the company to sell its
products and its ability to continue as a going con-
cern, which might be in some cases of equal value
96 Grace Bros., Inc., vs.
(Testimony of Jesse Tapp.)
to its physical assets or other financial factors that
we would consider.
Q. Have you ever made any valuation or used
any formula for determining any valuation for that
type of assets?
A. Well, our — rather, I should say, the usual
methods would be to try to arrive at some estimate
of the company's earning power and capitalize that
on some reasonable basis. We do that more par-
ticularly in connection with the valuation of farm
property than we do with business property, al-
though occasionally it comes up with business prop-
erty.
Q. Have you ever testified in Court as an expert
witness as to [109] determination of going concern
value for any business concern?
A. I have testified in connection with valuation
of farming property on the basis of its earning
capacity.
Q. Have you, in making your analysis of intan-
gible values, considered that those values are in-
fluenced by your determination of the extent of the
reputation or value of the product or the earning
capacity of any business concern?
A. Yes. That would be true. In the wine indus-
try particularly the reputation of the wines and the
location of the plant and general reputation of the
management is important factor.
Q. Mr. Tapp, I show you a schedule which is
marked Exhibit 4 D attached to the stipulation of
facts introduced in this proceeding, which is a
Commissioner of Internal Revenue 97
(Testimony of Jesse Tapp.)
schedule of the earnings of the DeTurk Winery
operations of Grace Bros., Inc., for the seven years
1936 to 1942 inchisive.
Assuming that the DeTurk Winery manufactured
and sold wines of good reputation, assuming that
they have been conducting business at the same lo-
cation for all of these years and for years prior
thereto, for as far back as 1921, assuming that they
had a good organization and assuming that they
sold their wine and operated their business undej'
an identifiable trade name of The DeTurk Winery,
which had a good reputation, I ask you whether
you can give an opinion as to the going concern
value of this company.
I also want you to assume that, as it has been
stipulated in the stipulation of facts, this winery
had an average investment in inventory and intan-
gible property over this period of years of $150,000
and I ask you whether with that information you
can express an opinion as to the going concern
value of The DeTurk Winery? [110]
Q. In expressing your opinion of value, I ask
you to express it as of January, 1943.
A. Well, we have here aggregate net profits of
approximately —
The Court: You are speaking of annual profits,
average annual net profits'?
The Witness: I am speaking first of the aggre-
gate for the seven years, approximately $133,000,
which would be an average of slightly less than
$20,000.
98 Grace Bros., Inc., vs.
(Testimony of Jesse Tapp.)
Now included in that period are the years 1939,
'40 and '41, which were years of acute depression
in the wine industry as reflected in very low earn-
ings here and as reflected in what we know to have
been very low earnings in the wine industry, in fact,
losses for a great many members of the industry.
Therefore I would raise some question as to whether
or not the full seven year period would be adequate
for determining normal average earnings that might
l)e expected from a winery of this type.
If it included the years '43, '44 and '45 or a ten-
year period, it would probably show a different
average return.
The Court: Higher or lower?
The Witness: Higher.
If you take the four years exclusive of '39, '40
and '41, you would get an average of approximately
$25,000. So that, in getting an average net earn-
ings for that purpose of capitalization, I would be
inclined to take (having only the seven-year fig-
ures) those four years because those were not yeai's
of great profit in the wine industry and yet they
were more representative of what you might expect
for a considerable period of years than the period
including these three low years. [Ill]
Ca])italizing that, on the basis of eight per cent,
you would get a going concern value, say, of $300,-
000, a little over, $310,000, as a going concern value
of business earning that much over a considerable
period of years.
Commissioner of Internal Revenue 99
(Testimony of Jesse Tapp.)
That would be my method of arriving at the
going concern vakie of the entire business includ-
ing the tangible and intangible assets as well as the
other assets that the company has in the form of
good will, reputation, etc.
Q. (By Mr. Koster) : And if the tangible, if
the investment of the tangible assets averaged as in
this stipulation of facts, $150,000 per year over a
period of years, how would you arrive at the in-
tangible value?
A. I would simply deduct the $150,000 from
the $310,000 which would give you $160,000 which
was not represented by tangible assets.
Q. In making that computation you are assum-
ing there would be the same rate of return on the
tangible assets and on the intangible assets?
A. That's right.
Q. If you were to value the going concern value
of this company in June of 1942, would you arrive
at the same result?
A. Yes, because you are considering long-term
earnings, and at the same rate of capitalization, I
would get the same result.
Cross Examination
Upon cross examination by Mr. McFarland, Mr.
Tapp testified as follows:
Q. (By Mr. McFarland): Mr. Tapp, in your
computation, in your valuation, I should say, did
you consider that the going concern value neces-
sarily encompassed the sale of the trade name and
100 Grace Bros., Inc., vs.
(Testimony of Jesse Tapp.)
labels of a winery and the right to manufacture
wine under that trade name to the purchaser? [112]
A. I was assiuning a sale of the assets responsi-
ble for it.
Q. Those items are assets that are responsible
fo]' producing income?
A. The entire income producing assets.
Q. Xow the trade name and the right to manu-
facture wine under that label is certainly one of
those assets, isn't it?
A. If there is a trade name and it has —
Q. Do you know whether or not there is a trade
name here?
A. I am not familiar with the details of this
winery.
Q. You are not familiar with the details of the
sale at all?
A. No. I was testifying as to methods of com-
puting the valuation.
Q. If a winery was sold and the wine inventory
and the labels and the right to manufacture and all
of the various concomitant parts were transferred,
that is what you were considering, the basis of youi'
consideration, is that right?
A. I was simply computing the going concern
value based on the income producing demonstration
of the property.
Q. Is the manufacture of wine under a certain
label, that a winery has manufactured under that
label for a number of years, that is certainly an
asset you would consider in a transfer?
Commissioner of Internal Revenue 101
(Testimony of Jesse Tapp.)
A. That's right.
Q. And the right to manufacture the wine un-
der that label by the new purchaser would be con-
sidered in your judgment, wouldn't it?
A. If that is a part of what is considered here
in the net profits.
Q. I understand you didn't attempt to consider
the various elements of the transaction at this par-
ticular occasion, is that right?
A. I am simply trying to tell you how we would
convert net earnings into a valuation of the pro])-
erty. [113]
There being no further questions the witness was
excused.
Thereupon, there was offered and received in evi-
dence the following exhibits:
Respondent's Exhibit J, a photostatic copy of a
letter addressed to Garrett and Company at Brook-
lyn, New York, dated March 29, 1943 by The De-
Turk Winery by Manuel Felciano, attorney in fact ;
Respondent's Exhibit K, a letter written under
date of May 26, 1943 by L. A. Weller, addressed to
Joseph T. Grace;
Respondent's Exhibit L, a letter dated June 18,
1943 from Garrett and Company by L. A. Weller
to Joseph T. Grace;
Respondent's Exhibit M, an inter-office letter
from Mr. L. A. Weller to J. Campbell Moore of
Garrett and Company, dated November 5, 1946.
There being no further evidence the matter was
submitted to the Tax Court.
102 Grace Bros., Inc., vs.
The foregoing evidence and the Stipulation of
Facts and Exhibits attached thereto and the Ex-
hibits introduced in evidence at the trial, referred
to herein and designated for inclusion in the record
on appeal in the Designation of Contents of Record
on Appeal filed concurrently herewith, is all the
evidence adduced at the hearing before the Tax
Court of the United States which is material to
and necessary for the determination of the issues
presented on appeal, and the same is approved by
the undersigned attorneys for the petitioner on
review.
/s/ GEOROE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner.
Agreed to: June 24, 1948.
/s/ CHARLES OLIPHANT,
Chief Counsel,
Bureau of Internal Revenue.
Margaret Goydich, being first duly sworn, deposes
and says that she is a resident of the City and
County of San Francisco, California, is over the
age of 18 years and is not a party to the above cause
and that she served the foregoing Statement of
Evidence upon Charles Oliphant, Chief Counsel of
th(^ Bureau of Internal Revenue and counsel for
respondent by mailing to him a true copy thereof
in an envelope addressed to Charles Oliphant, Chief
Counsel of the Bureau of Internal Revenue, Wash-
ington, D. C, bearing proper postage, and regis-
Commissioner of Internal Revenue 103
tered and deposited at the United States Post Of-
fice, Station D, San Francisco, California on June
15, 1948.
/s/ MARGARET GOYDICH.
Subscribed and sworn to before me, a notary pub-
lic, this 15th day of June, 1948.
(Seal) JOHN F. BURNS,
Notary Public in and for the City and County of
San Francisco, State of California.
My Commission Expires April 12, 1949.
[Endorsed] : Filed June 21, 1948. [115]
The Tax Court of the United States
Docket No. 9766
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
STIPULATION OF FACTS
It is hereby stipulated and agreed by and between
parties hereto through their respective counsel that
in addition to the facts admitted by the pleadings
104 Grace Bros., Inc., vs.
the following facts shall be taken as true, provided
however, that this stipulation shall be without
prejudice to the rights of either party to introduce
other and further evidence not inconsistent with
the facts herein stipulated to be taken as true.
1. Petitioner was incorporated under the laws
of the State of California on November 22, 1910
and has its principal place of business in the City
of Santa Rosa, California.
2. During the year 1943, the petitioner kept its
books and records on the accrual basis of account-
ing and its income tax returns for 1943 were filed
on that basis.
3. In 1943, Mr. Joseph T. Grace was the sole
stockholder of the i:)etitioner, owning all of its out-
standing capital stock. [116]
4. In 1943 and for many years prior thereto the
petitioner was engaged in various business enter-
I^rises, including farming of various commodities
and manufacturing and selling beer.
5. From 1921 to 1942 the petitioner was aho
engaged in the business of operating a winery, mak-
ing and selling wine under the trade name of The
DeTurk Winery. Some of its wine was sold under
the trade name or label of The DeTurk Winery and
some was sold in bulk without label. The form of
invoice used by petitioner for this business was
headed ''The DeTurk Winery" and contained the
statements "Established 1876" and ''Owned hy
Grace Bros., Inc." Photostat copy of one of said
invoic(^s is attached hereto as Exhibit 1-A.
6. During 1941 and 1942 the petitioner sold the
Commissioner of Internal Revenue 105
following quantities of wine at an average price
per gallon, respectively —
Dry Wine
1941
1942
Bulk gallons
157,518
114,046
Bottles gallons
8.888
7,028
Average price per gallon
22.6c
22.2c
Sweet Wine
Bulk gallons
46,943
46,009
Bottles gallons
12,443
10,268
Average price per gallon
37.2c
36.8c
7. All of the petitioner's inventory of wine as of
December 31 1942 was produced prior to 1942 ex-
cepting 4,959 gallons of white dry wine which were
produced in October and November of 1942. [117]
8. On December 30, 1942, the petitioner had an
inventory of 522,761 gallons of wine of which 104,-
000 gallons were delivered on December 31, 1942
to Garrett & Co. as hereinafter stated, leaving a
balance of 418,761 gallons as of December 31, 1942
consisting of 248,635 gallons of dry wine and 170,-
126 gallons of sweet wine, which inventory was car-
ried on the books of the petitioner at $79,046.33.
9. Attached hereto and marked Exhibit 2-B
hereof, is a true copy of a Memorandum of Agree-
ment for Sale and Lease dated January 20, 1943,
addressed to Garrett & Co., Inc., Cucamonga, Cali-
fornia, by Joseph T. Grace and signed ''Jos. T.
Grace, doing business as DeTurk Winery."
10. Under this agreement Garrett & Co., Inc.
paid $52,000 to the petitioner computed at 50 cents
per gallon for 104,000 gallons of wine delivered to
Garrett & Co. by the petitioner in 1942. The peti-
tioner treated this as a sale of 104,000 gallons of
wine in 1942 and so reported it on its income tax
106 Grace Bros., Inc., vs.
return for that year. The petitioner's tax liability
for the year 1942 is not involved in this proceeding
relating to 1943.
11. Under said agreement Garrett & Co., Inc.
also ]mid to the petitioner during 1943, $124,317.50
computed at 50 cents a gallon for 248,635 gallons of
dry wine ; $94,862.41 computed at 50 cents a gallon
for 96,498 gallons of sweet wine and a somewhat
higher amount per gallon for 73,628 gallons of
sweet wine containing a higher sugar content than
required by California standards, all of which wines
were delivered by the petitioner to Garrett & Co.
during 1943. [118]
12. The respondent has treated the difference l)e-
tween the amount of $219,179.91 received from Gar-
rett & Co. as aforesaid, and the cost of the wine of
$79,046.33, or $140,133.58 as profit from sale of wine
taxable as ordinary income.
13. Garrett & Co. and the petitioner executed a
written lease on January 30, 1943 for the petition-
er's winery, together with all wine making machin-
ery and equipment located thereon. A true copy of
said lease is attached hereto and marked Exhibit
3-C. The lease provided for a term of 5 years with
option exercisable by the Lessee to renew the lease
for a similar period.
14. On April 15, 1944, the petitioner releas(^d
Garrett & Co. from said lease of said winery plant
by surrendering the executed lease. Garrett & Co.
released and relinquished possession of said winery,
and the petitioner sold the said winery plant to
Taylor and Company for a price of $150,000.
Commissioner of Infernal Revenue 107
15. The escrow covering the transaction was
opened with the Sonoma County Land Title Com-
pany, Santa Rosa, California, on March 2, 1944.
The company delivered its deed of the property
to the Taylor Company on April 15, 1944. Taylor
and Co. deposited the $150,000 purchase price on
March 7, 1944 and the transaction was completed
and the escrow closed by the delivery of the deed
to Taylor and Co. and the delivery of the $150,000
purchase price to Grace Bros., Inc. on April 15,
1944. At no time here material was Taylor & Co.
a subsidiary of or owned by Garrett & Co. [119]
16. Grace Bros., Inc. received rentals from Gar-
rett & Co. on the winery property up to and in-
cluding April, 1944. As soon as the sale of the
winery was completed, Mr. Grace returned the exe-
cuted and cancelled lease to Garrett & Co., and it
vacated the winery premises.
17. The petitioner's net income from its winery
business from the years 1936 to 1940 is disclosed
in the schedule attached hereto and marked Ex-
hibit 4-D. The petitioner's average investment in
the assets of its winery business during the period
1936 to 1942 was approximately $150,000.
18. On or about March 15, 1944, the petitioner
filed a California Bank and Corporation Franchise
tax return of its income for the calendar year 1943
under the provisions of the California Bank and
Corporation Franchise Tax Act, reporting on said
return a taxable net income of $276,030.17 and a
franchise tax of $9,385.03. Copy of said return is
attached hereto as Exhibit 5-E. Petitioner paid
108 Grace Bros., Inc., vs.
said franchise tax of $9,385.03 during the year 1944.
Petitioner did not claim this tax as a deduction on
its 1943 Federal income tax return and the respond-
ent has not allowed this tax as a deduction for 1943.
19. Should the Court determine that the said
tax is allowable as a deduction for 1943, the amount
thereof can be computed after the Court's decision
herein and can be given effect in the computation
under Rule 50. This issue has been submitted to
the Tax Court for decision in the case of Central
Investment Corporation, Docket No. 7959.
/s/ aEORGE H. KOSTER,
Counsel for Petitioner.
/s/ J. P. WENCHEL,
Counsel for Respondent. [121]
Commissioner of Internal Revenue 109
EXHIBIT 1-A
(Bonded No. 15)
THE DE TURK WINERY
Owned hy Grace Bros., Inc. Established 1876
806 Donahue Street
Santa Rosa, California
March 10, 1942
Sold to : Les Fils de ^laurice Cassin, Inc.
Address: Box 4293, Bennett Val Road
City : Santa Rosa, Calif.
Bills Payable at Our Office, Santa Rosa, Calif.
Pkg. Description Gallons Price Amount
10 bbls. Saut No. 1 473/2 50 246.75
[Stamp] : De Turk Winerj'
[Stamp] : De Turk Winery
Ship in Bond to
Bon
ded Winery 1262
local bulk
Total Wine
License No.
Calif. Merch.
Tax
— Drv
Calif. Merch.
Tax
— Swt.
Federal Tax
—Dry
Federal Tax
—Swt.
State Tax
— Dry-
State Tax
—Swt.
Freight or Drayage
In Bond
Total Tax & Freight
[Figures circled in penciled] : 702 11 703 246.75
Cooperage 10 5 50.00
[No. 52371 (W) Total Amount 296.75
This Is Your Invoice — No Copy Will Be Sent Unless Requested
Shipment No. 10923 Serial No. 114281-90
1 10 Grace Bros., Inc., vs.
Exhibit 1-A — (Continued)
(Bonded No. 15)
THE DE TURK WINERY
0\viied by Grace Bros., Inc. Established 1876
3636 806 Donahue Street
Santa Rosa, California
March 10, 1942
Sold To : A. Figone Co.
Address : 89 Clay St.
City : San Francisco, Calif.
Bills Payable at Our Office. Santa Rosa, California
Pkg. Description
Gallons
Price
Amount
3 bbls. Swt Port
149.5
35
52.33
[Stamp] : De
Turk Winery
Scioroni bulk
[Stamp] : Mar
• 15 1942
A
De
! Turk Winery
Total Wine
License No. B 13743
Calif. Merch. Tax
—Dry
Calif. Merch. Tax
—Swt.
149/2
1/
2.24
Federal Tax
—Dry
Federal Tax
—Swt.
149^
30
44.85
State Tax
—Dry
State Tax
— Swt.
149/2
2
2.99
Freight or Drayage
pencil] : '
702
149/
1/2
2.24
Total Tax & Fi-eight
52.32
[Figures circled in
12
104.65
Cooperage
3
5
15.00
[No. 5238]
Total Amount
119.65
This Is Your Invoice — No Copy Will Be Sent Unless Requested
Shipment No. 10924 Serial No. 114291-93
Commissioner of Internal Revenue 111
EXHIBIT 2-B
Santa Rosa, California
January 20th, 1943
Garrett & Company, Inc.,
Cucamonga, California.
Attention: Mr. L. A. Weller, Vice President
Dear Sirs :
The following is a memorandum of agreement for
sales and lease agreed upon between the undersigned
Joseph T. Grace, doing business as DeTurk Winery,
of Santa Rosa, California, and Garrett & Company,
Inc., a New York corporation, acting through Mr.
L. A. Weller, its Vice-President, to-wit:
Said Jos. T. Grace, has sold and said Garrett &
Company, Inc. has bought as of December 31, 1942,
104,000 gallons of wine situate at DeTurk Winery,
at Santa Rosa, California, for the sum of $52,000.00
in cash, the receipt whereof by seller, on January 6,
1943, is hereby acknowledged. Said Jos. T. Grace
further agrees to sell and said Garrett & Company,
Inc., agree to buy, all of the remainder of that cer-
tain inventory of wines now on hand at said De
Turk Winery consisting of approximately 416,000
gallons, including both sweet and dry wines, at the
purchase price of fifty cents (50c) per gallon. The
balance of said wine is to be paid for as said wine
is shipped, settlement to be made monthly, provided,
however, that not less than 1/lOth of the remaining
balance of said purchase price is to be paid monthly
for the period of ten (10) months from and after
this date, and provided further that the whole of
112 Grace Bros., Inc., vs.
Exhibit 2-B— (Continued)
said purchase price is to be paid in full on or before
ten (10) months from this date. The aforesaid 104,-
000 gallons of wine is to be retained by seller as
security for the performance by buyer of this agree-
ment for the purchase of the remaining 416,000
gallons of wine. [123]
It is understood that the inventory of wine sold
approximates 520,000 gallons. An inventory of said
wine is presently being taken by the authorities of
the Internal Revenue Department and such inven-
tory is to be accepted by both buyer and seller as
the correct quantity of wine hereby sold.
It is understood that approximately 80,000 gallons
of wine contains more sugar than called for by
California standards, and that an increased price
over and above said purchase price of fifty cents
(50c) per gallon is to be paid for such gallonage
containing said increased sugar content, the in-
creased price therefor to be computed by A. R.
Morrow, of San Francisco, on the accepted standard
basis. The buyer shall have thirty (30) days from
and after this date to report as to the unsatisfactory
condition of any of said wine as being not up to
California standards and it is agreed that such
gallonage as may be not up to California standards
of quality may be deducted from said inventory and
retained by the seller. In the event no objection as
to quality of wine is made by the buyer within said
period of thirty (30) days, such failure to object
shall be deemed an agreement on the part of the
buyer that all the wine covered in said inventory
Commissioner of Internal Revenue 113
Exhibit 2-B— (Continued)
is accepted as of good quality and conforming to
California standards.
The buyer Garrett & Company, Inc., agrees to pay
all state and county taxes which may be assessed
as of March, 1943, as a lien against 150,000 gallons
of sweet wine, included in said inventory, and the
seller agrees to pay all state and county taxes that
may be assessed as of March, 1943, against the re-
mainder of the wine included in said inventory. The
buyer further agrees to pay all marketing taxes due
the State of California upon said wine as it may be
shipped.
The buyer agrees, at its own cost and expense, to
pay all fire insurance premiums on said wines from
and after the date hereof. The seller further [124]
agrees to sell approximately 600 wine barrels now
on hand in said winery at the price of Four Dollars
($4.00) each, it being understood that the seller
shall, at his own cost and expense, put said wine
barrels in a usable condition satisfactory to the
buyer.
The buyer is to be allowed 1% loss for wastage
on all wine shipped within said period of ten (10)
months from this date, provided that if the total
amount of wine as shown by said inventory is re-
ceived or shipped by the buyer no allowance for
wastage shall be made.
It is further understood that said Jos. T. Grace
agrees to lease to said Garrett & Company, Inc., the
said DeTurk Winery and the adjoining property
used for wine making, including all machinery and
114 Grace Bros., Inc., vs.
Exhibit 2-B— (Continued)
equipment situate on said premises, for the term of
five (5) years, commencing January 1, 1943, at an
annual rental of Ten Thousand Dollars ($10,000.00)
payable quarterly in advance. Said lessee Garrett &
Company, Inc., shall have the privilege and option
of renewing said lease for an additional term of
five (5) years, at the same rental and upon the same
terms upon giving written notice of said option to
renew to the lessor not less than six (6) months
prior to the expiration of said original term.
The lessee agrees to maintain all of the leased
machinery and equipment in good working order
and in a reasonable state of repair, allowance being
made for ordinary wear and tear. The lessee shall
have the right to remove all machinery and equip-
ment installed by it at the expiration of said term,
or any extension thereof, such right of removal to
expire sixty (60) days after the expiration of said
lease, or any renewal thereof. The lessor shall carry
at this own expense, all fire insurance on the equip-
ment and building owned by him, and the lessee
shall at its own cost and expense carry fire insur-
ance on equipment and machinery that may be in-
stalled by said lessee. [125]
The lessor reserves the right to maintain an office
of approximately 20 feet by 40 feet in size, adjoin-
ing the present winery office, during the term of
said lease.
All expense for power and light consumed by the
lessee on said premises until separate installations
for the account of the lessee can be made, shall be
Commissioner of Internal Rcvenac 115
Exhibit 2-B— (Continued)
prorated on such basis as may be arrived at between
the lessor and lessee.
It is agreed that the lessor reserves the right to
use of the water from the wells on the leased prop-
erty for the operation of the cold storage plant ad-
joining said premises and owned by the lessor. It
is further agreed that the lessee, Garrett & Com-
pany, Inc., shall have the right to use brine from
the adjoining cold storage plant ow^ned by the
lessor, at such cost as may be agreed upon between
the parties hereto and in the event of their inability
to agree, the matter of proper charge for such use
shall be submitted to a board of three ar])itrators
chosen in the usual fashion.
It is understood that the present boilers now
situate on said premises are to be placed in such
condition by the lessor that the large boiler of ap-
proximately 100 horse power can operate at not less
than 75 pounds pressure and the smaller 40 horse
power at not less than 85 pounds pressure.
The lessor agrees to assign to the lessee for the
duration of the lease, and any extension thereof, all
rights and privileges in connection with the use of
the spur tracks of the Northwestern Pacific Rail-
road.
It is further understood that said lease is not to
be assigned or said premises sublet without the writ-
ten consent of the lessor.
It is further understood that any and all docu-
ments necessary to carry out the foregoing agree-
116 Grace Bros., Inc., vs.
ment of sale and lease, shall be executed by the
parties [126] as soon as it may conveniently be
done.
Very truly yours,
JOS. T. GRACE,
Jos. T. Grace, doing business as DeTurk Winery.
Approved and accepted:
GARRETT & COMPANY, INC.,
By L. A. WELLS,
Vice President. [127]
EXHIBIT 3-C
LEASE
This Indenture of Lease, Made this 30th day of
January, 1943, by and between Grace Bros., Inc., a
California corporation, and Jos T. Grace, herein-
after called "Lessor", and Garrett & Company,
Inc., a New York corporation, hereinafter called
''lessee",
Witnesseth :
That said lessor, for and in consideration of the
rents, covenants and agreements hereinafter men-
tioned on behalf of the lessee to be paid, kept and
performed, does by these presents lease to the said
lessee all that certain lot, piece or parcel of land
situate lying and being in the City of Santa Rosa,
County of Sonoma, State of California, and bounded
and particularly described as follows, to-wit:
Commencing at the point where the Southern line
of Ninth Street intersects the Eastern line of Dona-
hue Street; thence extending in a Southerly direc-
Commissioner of Internal Revenue 117
Exhibit 3-C— (Continued)
tion along Donahue Street, 432 feet; thence in an
Easterly direction 178 feet 10 inches to an iron pipe
driven in the ground; thence in a Northerly direc-
tion 375 feet 10 inches to the Southern line of Ninth
Street; thence in a Westerly direction along the
Southern line of Ninth Street, 139 feet, 9 inches,
to the point of beginning. Being the premises com-
monly known and described as DeTurk Winery;
together with all wine-making machinery and equip-
ment located therein and the right and privilege to
use the spur track of the Northwestern Pacific Rail-
road Company which runs along the Easterly side
of said property.
To Have And To Hold the said premises with the
appurtenances and said machinery and equipment
unto the said lessee, for the term of five years, com-
mencing on the date of issuance by the Internal
Revenue Service of Wine Producer's and Blender's
Basic Permit to Garrett & Company, Inc., and end-
ing December 31, 1947, reserving, however, unto the
lessor the right to maintain an office of approxi-
mately 30 feet [128] by 40 feet in size, adjoining
the present winery office, during the term of this
lease and any extension thereof.
Said lessee agrees to pay, as rental for said prem-
ises, the sum of Ten Thousand Dollars ($10,000.00)
annually, payable quarterly in advance in install-
ments of Twenty-five Hundred Dollars ($2,500.00)
each.
Said lessee is hereby given and granted the priv-
ilege and option of renewing this lease for an ad-
118 Grace Bros., Inc., vs.
Exhibit 3-C— (Continued)
ditional term of five years, beginning on the 1st day
of January, 1948, at the same rental and upon the
same terms and conditions as those herein set forth.
Notice of lessee's intention to exercise such option
must be given in writing by lessee to lessor not later
than the 30th day of June, 1947.
The said lessee does hereby promise to pay the
rental herein named and in the manner herein
specified. Said lessee also agrees to maintain all
of the leased machinery and equipment in good
working order and in a reasonable state of repair,
allowance being made for ordinary wear and tear.
It is agreed that the lessee shall have the right to
remove all machinery and equipment installed by it
at the expiration of said term or any extension
thereof, such right of removal to expire sixty days
after the expiration of said lease or any renewal
thereof.
It is further agreed that the lessor shall carry at
his expense, all fire insurance on the building and
the machinery and equipment owned by him, and
the lessee shall, at its own cost and expense, carry
fire insurance on equipment and machinery that may
be installed by it.
It is further agreed that all expense for power
and light consumed by the lessee on said premises
until separate installations for the account of the
lessee shall be made, shall be prorated on such basis
as may be agreed upon between the lessor and lessee
and that thereafter [129] the lessee shall pay all
Commissioner of Internal Revenue 119
Exhibit 3-C— (Continued)
expenses for power and light consumed by it on the
leased premises.
It is further agreed that the lessor reserves the
right to use water from the wells on the leased
property for the operation of lessor's cold storage
plant adjoining said premises and that the lessee
shall have the right to use brine from lessor's cold
storage plant adjoining said leased premises at such
cost as may be agreed upon between the parties
hereto. In the event of the inability of said parties
to agree upon the price for such brine the matter
of proper charges for the same shall be submitted
to a board of three arbitrators chosen in the usual
fashion.
It is also understood and agreed that the boilers
now situate on said leased premises are to be placed
in such condition by the lessor that the large boiler
of approximately 100 horsepower can operate at not
less than 75 pounds pressure and the smaller boiler
of approximately 40 horsepower, at not less than
85 pounds pressure.
Lessee agrees not to assign this lease or any x>^i't
thereof, nor to let or underlet the whole or any part
of said premises without the written consent of the
lessor first had and obtained ; and said lessee hereby
waives any right it may have to cancel this lease ])y
reason of failure to obtain tank cars. The provisions
of this lease shall extend to and include the ex-
ecutors, administrators, and assigns of lessor Joseph
T. Grace and the successors and assigns of the other
parties to this lease.
It is further agreed between the parties to these
120 Grace Bros., Inc., vs.
Exhibit 3-C— (Continued)
presents that in case the premises hereby leased
shall be partially damaged hj fire, the same shall
be rei^aired with due diligence by the lessor at the
lessor's expense; that in case the damages shall be
so extensive as to render said premises wholly un-
tenable, the rent hereby reserved shall cease until
such time as said premises shall be put in complete
repair, [130] but in case of the total destruction of
said premises by fire or otherwise, the rent shall l)e
paid up to the time of such destruction, any prepay-
ment refunded, and then and from thenceforth this
lease shall cease and terminate.
In Witness Whereof, said parties have executed
these presents, in duplicate, the day and year first
above written.
GRACE BROS., INC.,
By /s/ J. T. GRACE,
President.
Lessor.
GARRETT & COMPANY, INC.,
By /s/ L. A. WELLER,
Vice President,
Lessee. [131]
SALES OF WIN
Other Income
1941
$ 88,175.96
1,146.12
WINERY OPERA'
Labor j
Fuel Oil I
Miscellaneous Su]
Repairs j
Insurance J
Miscellaneous Ex
Depreciation
Power Plant
Dump Truck
Taxes
Inventory Cost...
Professional Serv
5,380.79
581.21
1,084.72
1,411.36
2.505.79
1,315.81
2,571.97
1,859.65
53.56
2,991.38
41,077.55
$ 60,833.79
WINERY BOTTLi
Labor I $ 1,316.74
Supplies 6,632.97
Insurance 85.94
Depreciation 37.27
Taxes 28.62
Inventory Cost.... 6,784.48
Freight
SELLING EXPE?
Salaries and Com
Advertising
Bad Debts
Miscellaneous
Hauling and Deli
Taxes
Dues and Subscri
TOTAL EX
NET PROF
[Endorsed] :
3,418.08
410.41
643.11
304.00
831.47
$ 5,607.07
81,326.88
$ 7,995.20
1942
$121,491.05
6.605.83
TOTAL REC $ 89,322.08 $128,096.88
6,134.32
607.13
629.20
1,137.05
1,189.64
2,949.60
2,050.40
37.75
4,100.00
69,115.82
$ 87,950.91
$
1,173.70
4,417.00
26.75
4,402.53
$ 14,886.02 $ 10,019.98
$
3,398.80
1,243.33
4,339.90
311.02
1,738.92
134.49
$ 11,166.46
109,137.35
$ 18,959.53
J5 M
EXHIBIT 4-D
(iRACE BROS., INC.
ANALYSIS OF WINERY OPERATIONS
1936 - 1942
1936 1937 1938 1939
SAIJCS OF WI.NBS $185,4.-)8.03 *207,.539.7.'i $102,666.68 $ 77,805.77 iji 68,613.15 $ 88,175.96 $121,491.05
Other Income 84-6.50 2,145.60 3,840.20 1,064.80 1,146.12 6,605.83
TOTAL RECEIPTS $185,458.03 $208,386.25 $104,812.28 $ 81,645.97 $ 69,677.95 $ 89,322.08 $128,096.88
WINKRY OPERATING EXPENSE
I'lil)')!- $ 7,728.93 $ 10,342.27 $ 8,306.96 $ 4,974.13 $ 5,433.13 $ 5,380.79 $ 6,134.32
Fui-lOil 1,791.38 1,182.21 1,062.55 1,452.65 550.69 .581.21 607.13
MiRcellaneouB Supplies 2,295.43 747.48 1,09197 884 59 1084 72 629 ''0
Repairs 793.03 1,023.29 497.65 590.28 1,391.51 1,411.36 1,137.05
Insurance 2,537.47 2,588.76 2,176.56 2,751.99 2,144.65 2,505.79
MiscelluneoUB Expense 2,392.31 1.021.34 1,315.81 1,189.64
Depreciation 2,368.30 2,595.06 2,656.44 2.715.24 2,564.62 2,571.97 2,949 60
Power I'lant 2,288.72 1,813.04 1,474.85 1,859.65 2,050.40
Dump Truck 76.04 368.19 24.87 53.56 37.75
Taxes 2,184.23 3,014.08 2,212.75 2,603.25 2,307.09 2,991..38 4,100.00
Inventoi-y Cost 109,061.77 127,515.20 51,097.72 37.452.80 26,121.89 41,077.55 69,115.82
Professional Services 5,948.30 5,314.66 250.00
$134,708.84 $155,940.29 $ 70,821.15 $ 57.867.66 $ 42,444.38 $ 60,833.79 $ 87,950.91
WINKRY BOTTLING EXPENSE
Liil'or $ 2,523.43 $ 1,398.63 $ 2,446.46 $ 1,475.05 $ 1,316.74 $ 1,173.70
Supplies 8,450.60 4.580.20 3,930.62 6.632.97 4,417.00
Insurance • _ 89.66 105.40 23.16 42.39 85.94 26.75
Depreciation 36.36 37.03 37.86 37.27 37.27
Taxes 30.86 38.60 118.44 71.96 28.62
Inventory Cost 5,369.50 6,784.48 4,402.53
Freight 2,401.12
$ 13,264.73 $ 13,532.03 $ 6.1.59.86 $ 2,625.92 $ 10,926.79 $ 14,886.02 $ 10,019.98
SELLING EXPENSE
Siilurics anil Commissions $ $ 4.058.90 $ 6,456.60 $ 2,313.23 $ 2,853.80 $ 3,418.08 $ 3,398.80
Ailv.Mlisinn 232.86 169.65 139.19 410.41 1,243.33
»nil Dclits 98.39 643.11 4,339.90
Miscellaneous 304.00 311.02
IlaulinK ami Delivering 246.10 124.34 1,906.92 1,374.37 831.47 1,738.92
Tnxe.s 189.56 134.49
Dues and Subscriptkjns 1.191.14 702.76 733.01 1,290.00
$ 10,874.28 $ 5,729.00 $ 7,453.35 $ 5,051.55 $ 5,846.92 $ 5,607.07 $ 11.166.46
TOTAL EXPENSE 1.58.847.85 175.201.32 84,434.36 65.545.13 59,218.09 81,326.88 109,137.35
NKT PROFIT V * 26.(>10.1S $ 33,184.93 $ 20.377.92 $ 16,100.84 $ 10,459.86 $ 7,995.20 $ 18,959.53
[Endoised] : File(LMay 26, 1947. [132]
iXlu^ ' ..- /3 5- ^^ If
_ r—.M. - UNITED STATES ' ^^Jq , a jtJ '
JjIi^irL- CORIWATION INCOME AID DECLAIEDVAUIEEXCESMY 1943 1
■ fawlyiir
For Calendar Year 1943 J___ n ^ i
wuwT wuui*T c— fwurii I mf «§■ «— Bi '^ *** ,
41 BaUaMaf
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W.. Ill* oadrralCBal, _
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Mtwdnla ud auUBMU) bo bMs axunijMd bTUa aad li, to (bkaM ol WikaMMpM<MuL»«
(or U* uubto mr fUUd. porawat to tba Isuraal ■iiMii CMi aad tto NgriMliH Iaa4 *M|
8<il>Mf<b>d Hd rnra Is bi<oc*
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of wui«*b 1 «T hav* ac7 kaovtodga
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DEtXAKED VALUE EXCrSS-PROFITS TAX COMWJTATIOW. (S., CmpuKLon InMructiaa)
I. N<4 lamat tor <lMlu«d xlw amsM-frafll* lax aonpatolioii ntmi SI |Mg> I) _ , < 272^008 BS
a. M p.R«.t .f M- 2 |, §50^000 l»
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dMUnd T.lt>» eirn^pn^u Ui (Uw I oiiou* loul el Uaa J ax) 4) It tSUMS {■
INCOME TAX OOMIVTATIOW. - - . i ir ■ - - ;
rz-^jm i r
-/
j a WWII l«i IM I m iMi (iUB «0. paai I) _
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tapviaaMnial MiiraMtftia m ail id %m I
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1943
For Calendar Year 1943
mkdwm^i^ m .1943.aiJeaiiC " "*
rmmt njum-T oavoBATKKra nuts and aookcss
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__ IKX OOMBDI 9IBIEr
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!&?»?»—)
i«>j9 1. F«« iia
EXCESS niOFITS TAX COMPin'ATION
fash Ch*r«> MO
127,118 04
37,582 43
41,495| 28
B4,077| 71
««ia inMi Mt teMM (Mm 7, <
I 1, or HiB 7, aoluBB S, whichever ii appUcablr).
lo th« andtt pforidad by netioa M (r)) (item U. pi«e I. Form 1 1101
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I (A< h UfBAtJ AND ASScicMTP
il I MMJinai Av( ^ata NaM. I «C<
/I •-.
QUESTIONS __^^^__-,.=
U> D^ - U.«.rpo«.«........ .JliiBi»*W »► WW (k, suu or —'^ ~g-^^*!l' - ■ •
It) l-«lto»««r'»o«icr HI »hich )0«r tnctnur t«i n-luni for Ihr l»»»blr >r«r »•• awl —.■W-'A*" * •
if) U thh > »ni.-.|Hta«j»l rrtum? MO If <«.. |»wurT- frcai thr n.ll«^<.r K..mi Ml, Afflllallnna Hchcl.il.-. «hirh .h«ll I- fllW In. mwon lu, Mxi AV
^ ft pari i4 lUr cuiiMil)(i«tr<l inrufiiv IMji n>turn.
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l>\ iIm uuuuui U auu.rtiuUr LmkI |>r< imuui uiiUer auctiuu 125 ■tlntiutatik- tu, all (■uvcriiUM.'Ul ut>lm>tiuua ili rr ibed lit anctHMi 22«liM4) uf tlw Uleni
Rrvefiur l'o*Jr? i Aiiawrr "yr«" ur "n«»'") ^
(/> Al» .vou a lr»iiij«-n>r or trmnnfrrrr ii|«>n »ii <»rhjumr w •Irfinoi bjr •vettoo 700 or 781 ol the lnI«rTuJ llevenur CcideT (Aaawer '>«•" or "oo") .....
(f ) Itura thu mum Involve an ailjitftiwnit of Ihr duva proAu '.at UabUlty du* to the aijplkmliuti ul the T tinne ipeeUlad in (I) bdowT (Answer "jra
or "no") If an*wer in ' >e«":
(1) Chrrk lh<- apprfprmir m^ Ikina an<l Mihinit orhMtuIn ahowinK raininiution: 7in(>>M) [1:731 fli 7M D: 731 Q: 73&(b) C;. 73&(r) Q. 7a«<a) C
TM^bl G i.-^^' (^"■m'ral liialnjrlM>iia K, I , li, II, aiul I | i.t.nirr amouul <if iirra prohK lal M lu-ni IH (l<), \mtie \ I
(3) Fmfn llw >i'li>'<ltil<'> KulHiiillr*! undrr (ll ahovr. entrr any tax adjuKtmefit which r<sull< frum the applicallon if rmrh if th<- followmii •r<«iiici
721. ( . rHi. » ; 731. >
(S) Fmcn Ihr •rlu-<liilr<i inihniiltr<t under (I) ahnvi-, •■nleruiy ioeome adiiMtmral which reeulla from the appliration nf earh if llir followinti ><<rtloa
721, » .;73l,« ;7T'.ii.,,« ; 735(f). $
|A) Hute BnHM:nt tf tuUl aacta aa of the en.l of tU- UuMf year (Prom Form 11^, |m«i- 4, line 8, Lut rolumn), S _
ScKeduU A. EIXCESS PROFITS NET INCOME COMPUTATION
1. Normal-tai nrt inromr (romptitrd without allowanrr of crrdit for ineocne rahject to exeeii proAla fiA9 £"^1 US
tai and without allooancFof diviflpiKlarra-iviilrrodil) (iu-in37, pa«e I, Form liaO) 'S ' »Of,*i>* 9»
7. Net ahort-term rapital itaiii dlo not enter net aburt-tem capital lo«i)._ ' -
3. Ailjuatntent to net o|M'ratinK loee deduction..
4. Decreaar in dcflurtioiia limited )>y inrome. .
A. 50 percent of intereat on iNirroweil capital ..
e. Intereet on Ciovfrninrnt oliliKatiooa (are queation (c) abora, for eleetioa).
Total <rf hiiea 1 to « i 8 ■ ^ 867 .BSl
tg_
8. Net itain from aale or eiclianite of capital mmrts (item 13 (a), |ia«e I, Ponn 1130) I t. $ 140«I99 96
9. Income from retimment or diacharnr o/ liofida, etc j -
ID Kefunda and itilireat on Acrirultural Adjuatmcnt Act taxca.. ~-. —
1 1 Krcoveriea of lia<l detiu
• 1
3, (a) Dividenila rrveitot crolil adjuatmcnt (item 13, pa«e 1, Form n30,exeliidin«diiridendf reeeired
fri»ni fon-iitn coriMirational
(k) I>IVK>en<lK n-<-eivc<l crwiil adjuatUM-nl (Item 13. pa«e 1, Form 1130. escluding dlVMlrlkla ro-
eeived from forrMtn |M'n«otial holding companiea afid divideoda received on atiiclt h«-ld pri- 1
marilr for ule to runioaipn hy a dealer in aecuhiicKl „ iiiiiii ii
4. Nnnlasalile income of certain inHiiatriea with rlrpletA>>le rMMU|r«^r« ,...• ^ '
1
IllXltV ■!
Total irf lilK-a ft lo 14
t 140.19S 96
ft. Kxeeaa profiu lai net inctmie comput^'d without rcKard to deductinna applicalile to life hwurance ,
t.. i27»na j M
'. IVductiona ai>plieahle to life iiiauranee eotDDaniea \ 1
1
K. Kireaa prollu net income coaip<ited under inamie rrrdit method or Invaetad capital eradit method 1 ,
(Ime 16, or line IH minua line 17 in ea« ol a life inauranee cnapany) _ II >
, U7.Ue 104
\.)^
//
'>^
A(
SckMhaU C— EXC139 mOrTTS CHEDIT— BASED ON mVCSITO CAPTTAL .
ll.nrv |»i.l III (or ttotk, nr ■■ pttvl-in «iin'><>« '" — • eunlributioa to espit«l
•r..|»rty |«i<l In for .lock, or m paid-in •urplua, or M a eoalrilMiUuo to mpiUL..
Hi-irilmliuna of esmiu||> uid proflU In »Uicli of the oo*po««Uo«
d) Acruiiiulkt«d eamiiiipi an<l iinifitf. — -
b) Adjiutnifint for trsnafcrur'a deftcit umler Mciioa 71« (f) (5)
O laenmm or drew— uodof itiioo 781 (d) (1) on »«»ount tt lDt»wcnw*>» IM hl i H — —
fi ArrumulatMl mnkn»t.t!a<i proHU (llMn 4 (»)) M adjiutad by Item 4 (b) ud («) iP > l ll tlW l ift i i^jRtlLJj— L— JWfcMA
(4 prr«-iit of new tapitnl paid in duHn« n Uubte J—i becliiali« after Daeeafaar *!, IMB.
i,rrr.«e on aeeount of tnterMrponte UquldatloB umke aaetioB 7»l (d) (J)
l>.lir.i in eamlnv and pra6ta of another aonwratioa udar eaetiaa ru (•) (7)
Foial u( liBM 1 to 7 l -
Urnrn. DMribattoia made prior to the taubia jtar not eat of aMuinulMed aaninff aad | »i «a .
Eamlni^ and prnata of another eorporatl o n required to ba dedtt^ed by netlua 7U (b) (I)
DrrrraM on aeoount of Inter eorporata UqaldaUoB ander aetUoa 7*1 (d) (1)
DrAdt in earning and praAU l«i»»ee«e dr a| i l>a l of aaoUwr«ctpaw«ta«(pii M »TM(b)(«))
rotal of Unaa 9 to IS _
tjquhy inTMUd a^iWal at beginalnc of taiabte year (Una t ■Jam Vm» l»)
"ITMM-
MoMy paid In lor eioek. or m paid-in mrptaa, or aa a aoatrlbwtlaa to eapMal —
Property paid in for aUMk, or a« paid-in MDptaa, or H • aoatritatiaa to ipl t aL.
Di»tributloMofaaiiiininnd>wau(ot>» «h i«M «i dapini l| » « a<iilthil« »M »yi«^l«ttMlli<
the eorporatlon (eenlhw M. below) :
26 pereent of new eapHal
Increaae on aoeount of Intarearpamta Uqntdalka nBdi
Deceit in eanii^l and proit* of tmMm wipwU— I
Total additioM In Ubm U to »
ToUl of Hum 14 and Jl
TU (d) a)..
TUWO)-
DietHbotloaa net oat of earning aad proAta of the tanalile year
Hork diatribotloiM fran acrumolaied eanilnai and proflta at heginalng •( yoar (n* ■■• IT, ifcavi).
Drcreaae on aeeount of Inlereorporata bqiiidntioa under eaetloa 7*1 (d) (S)
DeMt In earning aad pradu in^idid lak>*aMad«apilal aliiUfciriinmHa (iiiMnTM»)(l))
Total feductioiu in linee 3S to M
• Cta>«««.h^*4
Averaae equity ini» ted eapKal (Mne M mlnne Mae >7)-
« SUM. Ml.
Avernce bornnred capital (aUaek Hhadnlr)-
Avprace bomnrad ioTcated eapital (SO peraent of Una Id).
Avernce kiveeted eapital (Una U pio* liae SO)
Total InaHmleelhle Maeta.
Total adwMihhi and Inadmlirtili aanto
IVrrenta«c vhlcli line SS la of Una SSi
K<-durtian on aerount of InadBfaaBtta aaali ( m^— fm
1 •(■»«)-
Invcatad capital (Una SI mlnua line S^
Ponioo of line 30 (not hi neeea of 16.^00,000); and andit •» • liiiiiat
Portloa of line St (oror 16,000,000, bui not orer llOpaOD^OOaO ; md
fortioa of line SO (orer 110,000,000, bat not orer
Portiaa of line 36 (over ngO,000,aOO) ; aad aodlt U t
Euaa pmdta credit— baaed aa toiwli* eaytlal (totol «f M— W to dit.
//'/
^
ii
Commissioner of Internal Revenue 131
EXHIBIT J
Grace Bros. Inc.
Santa Rosa, Cal.
^1
March 29, 1943
Garrett & Company, Inc.
Brooklyn
New York
Gentlemen :
We wish to advise you that, according to our
agreement of January 20, 1943, the inventory as
taken by Federal Inspector Pedersen on January
20, 1943, is as follows:
248,635 Gallons Dry Wine
274,126 Gallons Sweet Wine
The above to be paid for at the rate of 50c per
gallon.
Included in this inventory, however, is five tanks
containing 73,628 gallons of sweet wine which con-
tains sugar above the standard, and which is to be
paid for at 4c per gallon additional.
Very truly yours,
DE TURK WINERY,
By /s/ MANUEL FELCIANO,
Atty-in-fact.
MF:lmc [159]
134 Grace Bros., Inc., vs.
EXHIBIT L
From Garrett & Co.
Cucamonga, Calif.
June 18, 1943
Mr. Joseph T. Grace,
c/o DeTurk Winery,
Santa Rosa, Calif.
Dear Mr. Grace:
On May 26th we wrote you, as per attached copy,
requesting that you render billing to our Brooklyn
office for the gallonage of wines as finally agreed
upon between us.
On the date of June 14th they advised that they
have not received this and are very anxious to have
it immediately, before closing their books toward
the end of this month, so will you please attend to
this promptly and let us have a copy here for our
records and greatly oblige.
Very truly yours,
GARRETT & CO., INC.,
L. A. WELLER,
Vice President.
LAWicp End. [161]
Commissioner of Infernal Revenue 135
EXHIBIT M
L. A. Weller November 5, 1946
J. Campbell Moore
Dear Campbell:
I have just had a visit from a Mr. McFarland and
Mr. Tonjes, the former from the San Francisco
office and the latter from the Los Angeles office of
the Internal Revenue Department. It seems that
they have a tax suit against Mr. Grace over our deal
with him for the Santa Rosa wine and plant lease
and they asked for my version of the transaction.
They read me Mr. Grace's statement of the trans-
action which was all right with two exceptions and
one was that Mr. Grace claims that when we were
dickering he wanted to sell us the winery and made
a price of $125,000.00 on it but that we insisted that
we would prefer a lease. I find nothing in the ex-
change of our telegrams about his wanting to sell
us the plant or do I have any recollection of it and
just what bearing this angle has on this case I
don't quite understand. Another mis-statement was
that it was I who put them in touch with the Taylor
Company who bought the plant in early 1944. The
fact is that I didn't know who Mr. Grace was dick-
ering with until the deal was practically closed.
In going through my file here they were inter-
ested to know the exact amount of wine involved
and we found this checked with the statement that
Mr. Grace had made to them but one thing that in-
terested them was that in one of Mr. Grace's wires
to us, of which I have copies of course, he went on
136 Grace Bros., Inc., vs.
to recite the gallonage of wine he was offering and
mentioned the price of 40c on some dry red and 55c
on some dry white and 65c on the sweets. They
asked me why we finally decided on the flat price of
50c all the way through and I told him it was
simply to simplify the transaction and I felt pretty
sure the check would show that at the prices men-
tioned above for the various quantities involved it
would average about 50c. In this telegram of Mr.
Grace's dated December 29, 1942 he mentions $12,-
000.00 as his lease price per year and they w^on-
dered why this was changed so I told them that we
simply told Mr. Grace that $12,000.00 was excessive
and finally agreed on $10,000.00 a year.
They were quite curious to know how this price
of $125,000.00 had got into the deal as the purchase
price and I was able to [162] find a letter to Rossi
Brothers written while we were trying to get out
from under our lease when they had asked me to
get a price from Mr. Grace on the winery because
they were not on friendly terms with him and over
the phone at that time Mr. Grace mentioned the
$125,000.00. My letter shows that in this conference
with Mr. Grace he asked if I was asking for a price
for ourselves and I explained to him that we were
not interested in purchasing and that it was for an-
other party who had asked me to get a price for
them. When I told Mr. Rossi about this he thought
the price excessive and dropped the matter and Mr.
Grace later sold to Taylor for $150,000.00 but I am
quite sure that at the time that we made this deal
with Mr. Grace in late December of 1942, the ques-
Commissioner of Internal Revenue 137
tion of the purchase of the winery was not brought
up at all.
I think one thing these fellows had in mind too
was whether or not the jjrice of this lease was ex-
cessive from our standpoint and whether or not we
agreed to this simply to get this wine and so I told
them we did not consider $10,000.00 excessive but
that it was a part of Mr. Grace ^s stipulation for the
sale of wine, that he would not sell the wine unless
we took a lease on the plant — that we had long
wanted a plant in that district anyway so had no
objection to making a lease and considered $10,-
000.00 a year reasonable. These two gentlemen were
very courteous and agreeable and wanted me to give
them copies of these telegrams, to and from Mr.
Grace, and also a copy of the wine inventory so I
told them I felt a hesitancy in doing this unless
with the approval of the Brooklyn office and so he
is writing you and Paulie today to authorize me to
give them copies.
I can see no harm in this and don't know why we
should hesitate to do this and I am afraid if we
don't they may sub-peona me to produce these wires
and correspondence and I would sure hate to get
involved in a long drawn out hearing which is to
be held soon in San Francisco. They told me quite
frankly that they might wish me as a witness in
any event but that they would see if they could
arrange to have my deposition taken instead of my
having to appear as a witness, so unless there are
objections that I don't see I wish you would wire
them or me to let them have copies of these wires
138 Grace Bi^os., Inc., vs.
and letters showing the discussions and results of
this deal. I find that they had a copy of our orig-
inal agreement with Mr. Grace dated January 20,
1943 and also a copy of the final lease.
Awaiting your reaction by wire and hoping to see
you out here soon, I am,
Sincerely yours,
L. A. WELLER.
LAW :mw
[Endorsed] : Filed May 25, 1947.
[Title of Tax Court and Cause.]
DESIGNATION OF CONTENTS OF RECORD
ON APPEAL
To the Clerk of The Tax Court of the United
States :
You are hereby requested to prepare, transmit
and deliver to the Clerk of the United States Cir-
cuit Court of Appeals for the Ninth Circuit, copies
duly certified as correct, of the following documents
and records in the above-entitled cause in connec-
tion with the Petition for Review by the United
States Circuit Court of Appeals for the Ninth Cir-
cuit heretofore filed by the above-named petitioner.
1. Docket entries.
2. Pleadings.
(a) Amended petition and notice of deficiency at-
tached to the original petition as Exhibit A and re-
ferred to in the amended petition.
Commissioner of Internal Revenue 139
(b) Answer of respondent to the amended peti-
tion. [164]
3. Findings of Fact and Opinion of The Tax
Court of the United States.
4. Decision of The Tax Court of the United
States.
5. Petition for Review.
6. Notice of Filing Petition for Review.
7. Statement of Points to be Relied Upon on
Appeal.
8. Statement of Evidence.
9. The Stipulation of Facts with the exhibits at-
tached thereto.
10. The following exhibits introduced in evidence
at the time of the hearing before The Tax Court :
(a) Respondent's Exhibit F — The final corpora-
tion income and declared value excess profits tax re-
turn of Grace Bros., Inc., for the year 1943.
(b) Respondent's Exhibit H — The final excess
profits tax return of Grace Bros., Inc., for the year
1943.
(c) Respondent's Exhibit I — Consisting of nine
telegrams.
(d) Respondent's Exhibit J — ^A letter dated Mar.
29, 1943, addresed to Garrett and Company by the
DeTurk Winery by Manuel Felciano, attorney in
fact.
(e) Respondent's Exhibit K — A letter dated May
26, 1943, addressed to Joseph T. Grace by L. A.
Weller.
(f) Respondent's Exhibit L — A letter dated June
140 Grace Bros., Inc., vs.
18, 1943, addressed to Joseph T. Grace by Garrett
and Company.
(g) Respondent's Exhibit M — An inter-office let-
ter dated November 5, 1946, from L. A. Weller to
J Campbell Moore of Garrett and Company. [165]
11. This Designation of Contents of Record on
Appeal.
/s/ GEORGE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner.
Agreed to June 24, 1948.
/s/ CHARLES OLIPHANT,
Chief Counsel, Bureau of
Internal Revenue.
(Affidavit of Service by Mail attached.)
[Endorsed] : Filed June 21, 1948. [166]
Commissioner of Internal Revenue 141
[Title of Tax Court and Cause.]
CERTIFICATE
I, Victor S. Mersch, clerk of The Tax Court of
the United States, do hereby certify that the fore-
going pages, 1 to 166, inclusive, contain and are a
true copy of the transcript of record, papers, and
proceedings on file and of record in my office as
called for by the Praecipe in the appeal (or ap-
peals) as above numbered and entitled.
In testimony whereof, I hereunto set my hand
and affix the seal of The Tax Court of the United
States, at Washington, in the District of Columbia,
this 2nd day of July, 1948.
(Seal) /s/ VICTOR S. MERSCH,
Clerk, The Tax Court of the
United States.
[Endorsed] : No. 11976. United States Court of
Appeals for the Ninth Circuit. Grace Bros., Inc.,
Petitioner, vs. Commissioner of Internal Revenue,
Respondent. Transcript of the Record. Upon Peti-
tion to Review a Decision of The Tax Court of the
United States.
Filed July 16, 1948.
/s/ PAUL P. O'BRIEN,
Clerk of the United States Court of Appeals for the
Ninth Circuit.
142 Grace Bros., Inc., vs.
United States Court of Appeals
for the Ninth Circuit
Docket No. 11976
GRACE BROS., INC.,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
STATEMENT OF POINTS TO BE RELIED
UPON ON APPEAL AND DESIGNATION
OF PORTION OF RECORD TO BE
PRINTED
Comes now the petitioner above named by its at-
torneys of record and states that it intends to rely
on appeal upon all and each of the errors assigned
in the Petition for Review herein, and petitioner
formally adopts the errors assigned in said Petition
for Review as its Statement of Points to be Relied
Upon on Appeal.
Petitioner further states that the portions of the
record designated for omission from the printed
transcript in the Stipulation of Portion of Record
to be Printed, filed herein, are not necessary for the
consideration of the issues presented on appeal and
requests that the entire record except the portions
thereof designated for omission therefrom in said
Stipulation of Portion of Record to be Printed, be
included in the printed transcript. Petitioner
further requests that said Stipulation of Portion
Commissioner of Internal Revenue 143
of Record to ])e Printed and this Statement of
Points to be Relied Upon and Designation of Por-
tion of Record to be Printed be included in the
printed transcript.
Dated August 18, 1948.
Respectfully submitted,
/s/ GEORGE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner on
Review.
(Affidavit of Service by Mail attached.)
[Endorsed]: Filed August 20, 1948. Paul P.
O'Brien, Clerk.
144 Grace Bros., Inc., vs.
[Title of U. S. Court of Appeals and Cause.]
STIPULATION OF PORTION OF RECOED
TO BE PRINTED
It is hereby stipulated and agreed by and between
the parties hereto through their respective counsel
of record that the portions of the record designated
below are not necessary for the consideration of the
issues presented on appeal and the clerk of the
Court is requested to omit the following portions of
the record from the printed transcript.
1. Pages 18 to 33, inclusive, of the certified rec-
ord, being pages 5 to 15, inclusive, of the deficiency
notice (Exhibit A attached to the Petition) and Ex-
hibits A, A-1, B, B-1 and C attached to said de-
ficiency notice.
2. Pages 133 and 134 of the certified record, be-
ing the California Franchise Tax Return for the
year 1943 attached to the Stipulation of Facts as
Exhibit 5-E.
3. Pages 141, 142 and 143 of the certified record,
being letters and statements with regard to the ex-
tension of time for filing Petitioner's Income and
Declared Value Excess Profits Tax Return (Form
1120) for the year 1943 and comprising part of Re-
spondent's Exhibit F.
4. Page 146 of the certified record, being Sched-
ule B of Petitioner's Excess Profits Tax Return
(Form 1121) for the year 1943 and part of Re-
spondent's Exhibit H.
5. Page 148 of the certified record, being a letter
extending the time for filing Petitioner's Excess
Commissioner of Internal lievenue 145
Profits Tax Return (Form 1121) for the year 1943
and part of Respondent's Exhibit H.
6. Pages 149 to 158, inclusive, of the certified
record, being nine telegrams comprising Respond-
ent's Exhibit I, all of which were read into the
record and are reproduced in full on pages 27 to 31
of the Statement of Evidence and on pages 88 to 92
of the certified record.
All of the certified record not designated herein
for omission shall be printed.
Dated this 17th day of August, 1948.
Respectfully submitted,
/s/ GEORCtE H. KOSTER,
/s/ BAYLEY KOHLMEIER,
Attorneys for Petitioner.
/s/ THERON LAMAR CAUDLE,
Assistant Attorney General,
Attorney for Respondent.
[Endorsed]: Filed August 20, 1948. Paul P.
O'Brien, Clerk.
No. 11,976
IN THE
United States Court of Appeals
For the Ninth Circuit
Grace Bros., Inc.,
vs.
Petitioner,
Commissioner of Internal Revenue,
Respondent.
PETITIONER'S OPENING BRIEF.
George H. Koster,
Bayley Kohlmeier,
300 Montgomery Street, San Francisco 4, California,
Attorneys for Petitioner.
OCT 2 c 194P
fPiUU P» O'BRIEN,
Subject Index
1 Page
Jurisdictional statement 1
Statement of the case 3
Specifications of error 8
Summary of argument 9
Argument 11
I. Introductory statement 11
II. At least $100,000 of the consideration received by peti-
tioner for the assets of its winery business was received
by petitioner for the good will of its said business and
constituted capital gain 16
(a) Summary of pertinent facts 16
(b) The evidence establishes that petitioner intended to
and actually did sell its good will 20
(c) Applicable decisions establish a legal presumption
that petitioner sold its good will when it sold its
business 22
(d) The grounds and reasons relied upon by the Tax
Court are not supported by the evidence and are
contrary to the applicable principles of law 27
(e) The facts and evidence establish that at least
$100,000 of the consideration received should be
allocated to the good will 35
(f) The determination of the Tax Court that no part
of the consideration received by petitioner was
received for the good will of its winery business
was clearly erroneous and should be reversed .... 38
III. The DeTurk winery business was a distinct business unit
of petitioner and gain derived from the sale of that
unitary business is a capital gain 39
IV. Petitioner's inventory of wine was converted into a
capital asset when petitioner determined to dispose of
its wineiy business and the assets thereof and the gain
realized upon the sale constituted long term capital gain 42
V. Conclusion 46
Table of Authorities Cited
Gases Pages
Adamson, James H., T. C. Memo. Docket 3154 40, 44
Aronson v. Commissioner (9 Cir., 1938), 98 F (2d) 2? . . . 13
Belridge Oil Co. v. Commissioner (9 Cir., 1936), 85 F
(2d) 762 13
Belridge Oil Company v. Helvering (9 Cir., 1934), 69 F
(2d) 432 1 30, 31
Betts V. United States, 62 Ct. Cls. 1 22
Butler Consol. Coal Co., 6 T. C. 183 45
Commissioner v. Euleon Jock Grocery (5 €ir., 1947), 159
F (2d) 324 43
Compana Corp. v. Harrison (7 Cir., 1940), 114 F (2d) 400 14
Didlake v. Roden Groceiy Co., 160 Ala. 484, 495, 49 So.
384, 387 22
Dobson V. Commissioner, 320 U. S. 489, 64 S. Ct. 239, 88
L. Ed. 248 13
Fleming v. Palmer (3 (Cir., 1941), 123 F (2d) 749 30
Foran v. Commissioner (5 Cir., 1948), 165 F (2d) 409 21
Graham Mill and Elevator Co. v. Thomas (6 Cir., 1945),
152 F (2d) 564 39, 40
Helvering v. Security Savings and Commercial Bank (4 Cir.,
1934), 72 F (2d) 874 19
Huggins, Ida P., 1 T. C. 1214, P.H.T.C. Memo. Dec, Vol. 12,
Par. 43172 32, 33, 34
Kelleher v. Commissioner (9 Cir., 1938), 94 F (2d) 294. . . 13
Kuhn V. Princess Lida of Thurn and Taxis (3 Cir., 1941),
119 F (2d) 704 14
Lurie v. Commissioner (9 Cir., 1946), 156 F (2d) 436 43
Pfleghar Hardware Specialty Co. v. Blair (2 Cir., 1929),
30 F (2d) 614 19, 22, 25, 27, 28, 31, 34
Table of Authorities Cited iii
Pages
Stilgenbaur v. United States (9; Cir.), 115 F (2d) 283, 25
AFTR 966 40
Tatt V. Commissioner (5 Cir., 1948), 166 F (2d) 697 21
Three States Lumber Co. (7 Cir., 1946), 158 F (2d) 61. . . . 44
United States v. Adamson (9 Cir., 1947), 161 F (2d) 942 40
United States v. Armature Rewinding Co. (8 Cir., 1942),
124 F (2d) 589 14
United States v. United States Gypsum Co. (1948), 333
U. S. 364, 92 L. Ed. (Ad. Op.) 552, 68 ,S. Ct. 525 14, 30
Wailes, Wm. v. Commissioner, 25 BTA 278 28, 31
White & Wells Co. v. Commissioner, 19 BTA 416 (2 Cir.),
50 F (2d) 1209 19, 22, 23, 24, 25, 27, 28, 31, 34
Williams v. McGowan (2 Cir.), 152 F (2d) 570 40, 41
Wyman and Co. v. Commissioner, 8 BTA 408 19
Codes
Internal Revenue Code, Section 272 2
Internal Revenue Code, Section 1141 (Title 26 U. S. Code,
Section 1141 a$ amended by Section 504 of the Revenue
Act of 1942) 2
Internal Revenue Code, Section 1141(a) (as amended by
Section 36 of Public Law 773, 80th Congress, Second
Session ) 13
28 U. S. C, Section 1254 14
Miscellaneous
Commissioner's Regulations, Regulation 111, Section 29.117-1 42
Paul, Randolph, Federal Estate and Gift Taxation, Vol. 2,
page 1242 19
No. 11,976
IN THE
United States Court of Appeals
For the Ninth Circuit
Grace Bros., Inc.,
Petitioner,
vs.
Commissioner of Internal Revenue,
Respondent.
PETITIONER'S OPENING BRIEF.
JURISDICTIONAL STATEMENT.
This is an appeal from a decision of The Tax Court
of the United States in which a deficiency in excess
profits taxes was determined against petitioner for the
year 1943. The findings of fact and opinion below
are reported in 10 T. C. 158 and are set foT'tli in full
in the record herein. (R. 18.)
Petitioner is a California corporation w^hich main-
tains its princi})al place of business in Santa Rosa,
California. (R. 104.) Petitioner's income and excess
profits tax returns for the year 1943 were duly filed
with the Collector of Internal Revenue for the First
District of Calif'oi'uia at San Francisco, California.
(R. 4, 17.) Respondent determined a deficiency in
petitioner's excess profits tax for the year 1943 in the
amount of $114,190.49 and on September 20, 1945, pur-
suant to Section 272 of the Internal Revenue Code,
respondent sent to petitioner a notice of said de-
ficiency. (R. 10.) On December 10, 1945, pursuant to
Section 272 of the Internal Revenue Code, petitioner
filed its appeal to The Tax Court of The United States
from said deficienc}^ determination and thereafter on
February 24, 1947 filed an amended petition to The
Tax Court of the United States and alleged therein
that it had overpaid its excess profits taxes for the
year 1943 l^y the amount of $23,913.11. (R. 4.) On
March 19, 1947 respondent filed his answer to said
amended petition, denying the claims and allegations
of petitioner. (R. 16.) The appeal was called for
hearing on May 26, 1947 and documentary and oral
evidence was introduced by both parties. On January
27, 1948 The Tax Court of the United States promul-
gated its findings of fact and opinion (R. 18) and on
April 5, 1948 the decision of the Tax Court was en-
tered, determining a deficiency in petitioner's excess
profits taxes for the year 1943 in the amount of $124,-
073.01. (R. 31.)
On June 14, 1948, under authority of Section 1141
of the Internal Revenue Code (Title 26, U. S. Code,
Section 1141, as amended by Section 504 of the Rev-
enue Act of 1942), petitioner filed its petition for re-
view by this Court of said decision of The Tax Court
of the United States. (R. 32.) This appeal and the
transcript of record herein were duly 11 led and
docketed in this Court on July 16, 1948. (R. 141.)
STATEMENT OF THE CASE.
The controversy herein involves petitioner's correct
excess profits tax liability for the year 1943, which in
turn depends upon the determination of the following
general issue: Whether the gain or any part thereof
realized by petitioner in 1943 from the sale of its
inventory of wine and its wdnery l)usiness is long term
capital gain or ordinary income subject to excess
profits tax.
Petitioner is a California corj^oration which was
organized in 1910 and which maintains its principal
place of business in Santa Rosa, California, (R. 104.)
In 1943 and for many years prior thereto ])etitioner
was engaged in various lousiness enterprises including
fanning, cattle raising, manufacturing and selling-
ice, cold storage, and manufacturing and selling beer.
(R. 104.) In 1921 petitioner acquired the DeTurk
Winery in Santa Rosa, California and from 1921
until 1942 was engaged, in addition to its other activi-
ties, in the lousiness of manufacturing and selling wine
under the trade name of the DeTurk Winery. (R.
104.) The DeTurk Winery had been Imilt in 1876 and
had been continuously operated at the same location
by petitioner and the prior owner from 1876 until the
end of 1942. (R. 50.) The wine produced and sold,
under the name of the DeTurk Winery was of better
than average quality and enjoyed a good reputation.
(R. 20, 43.) The operating staft* of the winery also
included valuable and well trained men. (R. 24, 57.)
During the jjeriod from 1936 to 1942, inclusive, peti-
tioner realized net profits from its winery business
4
ranging from $7,995.20 to $33,184.93. Petitioner's net
profit from said winery bnsiness during the year 1942
was $18,959.53. (R. 21.) During the year 1941 peti-
tioner sold 157,518 gallons of dry Avine in bulk and
8,888 gallons in bottles at an average price of 22.6^
per gallon, and sold 46,943 gallons of sweet wine in
bulk and 12,443 gallons in bottles at an average price
of 37.2^ per gallon. In 1942 petitioner sold 114,046
gallons of dry wine in bulk and 7,028 gallons in bottles
at an average price of 22.2^ per gallon, and 46,009
gallons of sweet wine in bulk and 10,268 gallons in
bottles at an average price of 36.8^ per gallon. As
dry wine should be held for two years or more and
red wine for one year for aging, petitioner kept a
substantial inventory in stock. (R. 21.)
Some time prior to October, 1942 petitioner decided
to go out of the winery business and to dispose of the
DeTurk Winery. (R. 52.) As the result of this de-
cision petitioner limited its production of wine in the
1942 vintage season to 4,959 gallons which it extracted
from grapes grown by it, whereas normally petition-
er's annual production was approximately 200,000
gallons. (R. 21.)
Mr. Joseph T. Grace, the president and sole stock-
holder of petitioner, was actively in charge of peti-
tioner's business affairs. In November, 1942, Mr.
Grace advised Mr. L. A. Weller, vice president of
Garrett and Company, Inc. of New York, that peti-
tioner intended to discontinue the wine business and
carried on negotiatitons and correspondence with Gar-
rett and C'Ompany through Mr. Weller with regard to
the sale of the wine and winery business of petitioner
to Garrett & Co. (R. 21, 53.) Mr. Grace advised Mr.
Weller that petitioner would not sell its wine inven-
tory unless it sold everything connected with its wine
business, including the winery and the good will. (R.
53.) At that time petitioner had an inventory of 522,-
761 gallons of wine and Mr. Grace advised Mr. Weller
that the winery was Avorth $125,000 and the inventory
and good will were worth $250,000. (R. 104, 54.) Mr.
Grace based his valuation of $250,000 for the wine
and the good will by estimating that petitioner could
realize $150,000 from the wine by continuing to sell
it in the regular course of business and by estimating
the value of the good will at five times the average
annual net earnings of the wine business, making a
good will value of $100,000. (R. 54-55.)
After numerous conversations and telegrams be-
tw'een Mr. Grace and Mr. Weller and other officers
of Garrett and Co., on December 31, 1942 Garrett
and Company offered to lease petitioner's winery and
equipment for five years at an annual rental of $10,-
000 and to purchase all of petitioner's wine at 50^ per
gallon (R. 55-56, 70-75). Since the amoimt to be paid
by Garrett & Co. on this basis gave to petitioner the
full amount it was asking foi' its wine and its winery
business, petitioner accepted the offer and shipped
104,000 gallons of wine that day. Petitioner received
$52,000 for the first shipment of wine and reported
the income in its 1942 income tax retiun (R. 22.) Peti-
tioner and Garrett & Co. entered into a written agree-
ment, dated January 20, 1943, with regard to the trans-
fer of the wine and the lease of the property (R. 105,
111-116). In 1943 petitioner transferred the balance
of its wine, consisting of 248,635 gallons of dry wine
and 170,126 gallons of sweet wine, its bottles and
cooperage, its DeTurk labels, its customer list, arid
its winery personnel to Garrett & Co. (R. 23, 106.)
Petitioner also delivered possession of its winery to
Garrett & Co. and surrendered its permit to manufac-
ture and sell wine so that Garrett & Co. could procure
a permit to operate a winery on the premises (R. 24,
57-58). After the transfer of the above assets, neither
petitioner nor Mr. Grace engaged in the making or
selling of wines (R. 24). During the year 1943 Garrett
& Co. paid to petitioner $124,317.50, computed at 50^
a gallon, for 248,635 gallons of dry wine, $94,862.41
computed at 50^ a gallon for 96,498 gallons of sweet
wine, and a somewhat higher price per gallon for 73,-
628 gallons of sweet wine which contained a higher
sugar content than was required by California stand-
ards (R. 23, 106). As the total price agreed upon was
slightly greater than the price originally asked, Mr.
Grace considered that petitioner had sold the entire
business, including good mil, to Garrett & Co. and
that petitioner had received $100,000 for the good
will of the winery business (R. 54, 56).
In its income tax return and its excess profits tax
return for 1943 petitioner treated the sale as a sale
of capital assets held for more than six months and
reported a long term capital gain in the amount of
$140,133.58, which gains are not subject to excess
profits tax (R. 127). Respondent treated the gain
from the sale as ordinary business income and thereby
substantially increased petitioner's net income subject
to excess profits tax and substantially increased peti-
tioner's excess profits tax liability for 1943 (R. 13).
In its appeal to the Tax Court petitioner presented
the following contentions :
1. At least $100,000 was received by petitioner
for its good will which was unquestionably a capi-
tal asset and therefore at least $100,000 of the
gain was long term capital gain realized from
the sale of the good will.
2. The transaction with Garrett & Co. in-
volved the disposition of a unitary business as
distinguished from particular assets, and there-
fore the entire profit from the transaction should
be treated as long term capital gain and taxed
accordingly.
3. When petitioner decided to discontinue
making wine and to dispose of the winery lousi-
ness, the wine on hand ceased to be held for sale
to customers in the ordinary course of petitioner's
business, and became a capital asset, and having
been held for more than six months (except the
4,959 gallons manufactured in 1942) the gain con-
stituted long term capital gain.
The Tax Court disregarded the testimony of the
witnesses and determined that the transaction l)etween
petitioner and Garrett & Co. was not a disposition of
the business as a imit and further determined that
since the winery was leased and not sold to Garrett &
Co. and since the price was determined on the basis
of 50 cents per gallon for the wine, the sale did not
8
cover anything but wine, that the wine was not con-
verted into a capital asset and that no part of the
consideration received by petitioner was received for
good will or other intangible assets. The Tax Court
affirmed the determination of respondent. (R. 25-30.)
SPECIFICATIONS OF ERROR.
In making and rendering its decision, as aforesaid,
The Tax Court of the United States erred to the preju-
dice of petitioner in the following respects :
1. In determining a deficiency in petitioner's
excess profits tax for the calendar year 1943 in
the amount of $124,073.01.
2. In failing to determine that there was no
deficiency in excess profits tax due from peti-
tioner for the year 1943 and that petitioner over-
paid its excess profits tax for said year by the
amount of at least $23,913.11.
3. In determining that the stock of wine sold
by petitioner during the year 1943 was not a
capital asset and that the gain derived therefrom
was ordinary income and not capital gain.
4. In determining that the transaction with
Garrett & Co. did not involve the disposition of
a unitary business, as distinguislied from particu-
lai* assets, the profit from whicli should be treated
as long term capital gain.
5. In determining that no part of the con-
sideration received by petitioner for its wine and
other assets connected with its winery business
was received for the good ^\ill of said winery
business.
6. In failing and refusing- to determine that
at least $100,000 of the consideration received by
petitioner for its wine and other assets connected
with the winery was received by petitioner for
the good will of petitioner's winery business.
7. In failing and refusing to accept the un-
contradicted testimony of the president of peti-
tioner that the petitioner sold its good will and
that the consideration received by petitioner upon
the sale of its wine and other assets of its winery
business exceeded the fair market value of the
tangible assets sold by at least $100,000 and that
said $100,000 represented consideration received
by petitioner for the good will of its winery
business.
SUMMARY OF ARGUMENT.
I. The e^ddence clearly establishes that in the
transaction with Garrett & Co. it was petitioner's in-
tention to sell its entire winery business including the
good will of that business which petitioner valued at
$100,000, that petitioner advised Garrett & Co. that
it would not sell any of the assets of its winery busi-
ness unless it sold the entire business includins: the
good will, that the selling price fixed by petitioner
included $100,000 for the good will, that Garrett & Co.
offered and petitioner accepted a })rice, computed on
the basis of fifty cents per gallon for tlic wine, which
was slightly larger than the price asked by })etitioner
for the assets transferred, including the good will. As
10
petitioner received the full price it asked it considered
that it I'eceived full consideration for its good will.
While the written communications between the
parties were in the form of a sale of wine and a lease
of the winery the evidence establishes that the trans-
action was intended to be and was in substance and
effect, if not in form, a sale of the entire winery
business including the good will.
The courts have recognized that a sale of a going
business necessarily involves a sale of the good will
of the business and have held that a portion of the
price must be allocated to the good will.
The Tax Court erred in ignoring the uncontradicted
testimony of a qualified witness and in refusing to con-
sider the substance and effect of the entire transac-
tion and its determination that the transaction did not
involve a sale of good will was clearly erroneous and
should be reversed.
II. As the transaction between petitioner and Gar-
rett & Co. was a sale of the entire winery business
as a going concern the gain realized therefrom was
long term capital gain and the Tax Court erred as
a matter of law in determining that the gain was ordi-
nary income.
III. When petitioner determined to discontinue its
winery business and to sell all the assets thereof the
wine inventory ceased to be held primarily for sale
to customers in the ordinary course of business and
became a capital asset. The gain realized from the
11
sale of the wine, except the 4,959 gallons produced in
1942, constituted long term capital gain. The Tax
Court erred as a matter of law in determining that
the wine did not become a capital asset and that the
gain from the sale thereof was ordinary income.
ARGUMENT.
I. INTRODUCTORY STATEMENT.
The issues j)resented to the Tax Court in the pro-
ceeding below and the issues presented to this Court
in this appeal arise out of the sale hy petitioner of
the assets owned and used by it in the operation of
its winery business prior to the sale. There is no con-
troversy with regard to the cost or other basis of the
assets sold, the total consideration received by peti-
tioner upon the sale, or the total gain realized from
the sale. The basic issue involved is whether all or
any part of the gain realized by petitioner was capital
gain or ordinary income. The determination of this
basic issue depends upon the determination of the
subordinate issues of (1) whether part of the con-
sideration was received by petitioner for the good will
of its business, (2) whether the transaction was a dis-
position of a imitary business as distinguished from
I3articular assets, and (3) whether the wine involved
was converted into a capital asset before the sale. Tlie
determination of miy of the above issues in favoi* of
petitioner will require the reversal of the decision of
the Tax Court.
12
The determination of the a])ove issues has an im-
portant effect for tax purposes for the reason that
long term capital gains were not subject to the excess
profits tax which was in effect for the year 1943,
whereas ordinary income was subject to the excess
profits tax.
Petitioner's interpretation of the transaction is that
it was a sale of its entire winery business, including
the good will, and not a mere sale of its stock of wines
as determined by respondent and the Tax Court. Peti-
tioner contends that at least $100,000 of the considera-
tion received by it for the business and assets was
received for good will and constituted capital gain.
Petitioner further contends that its decision to dis-
continue the operation of the winery business and to
sell all of the assets thereof effected a conversion of
the wine held in inventory to a capital asset and that
the gain realized upon the subsequent sale of the
business and assets was capital gain.
Under petitioner's interpretation of the transaction
the entire profit realized was capital gain and peti-
tioner reported the gain accordingly in its income tax
return. Respondent determined that the transaction in-
volved only a sale of wine and that the entire gain
was ordinary income. The Tax Court sustained re-
spondent's determination.
The above issues are mixed questions of law and
fact which involve the legal effect and the propei*
legal interpretation of the facts established by the evi-
dence in the case. Petitioner does not challenge any
13
of the facts specifically found by the Tax Court in
its Findings of Fact. However, in its opinion the Tax
Court states that it is unable to find certain facts
which petitioner contends are clearly established by
the evidence. The statements in the opinion of the
Tax Court were not made as findings of fact, but
merely as comments on the evidence and should not
be accepted as findings by the Court. Kelleher v. Com-
missioner (CCA-9, 1938) 94 F (2d) 294; Aronson v.
Commissioner (CCA-9, 1938) 98 F (2d) 23; Belridge
Oil Company v. Helvering (CCA-9, 1934) 69 F (2d)
432. But even if the statements, which will be speci-
fically discussed in the following portions of this brief,
can be considered as findings of fact, it is petitioner's
contention that the inferences and conclusions of the
Tax Court are not supported by any substantial evi-
dence, are contrary to the uncontradicted testimony of
the witnesses and other competent evidence in the
record and are clearly erroneous.
This Court has full power and jurisdiction to re-
view the findings and conclusions and decision of the
Tax Court and is no longer restricted by the doctrine
of Dohson V. Commissioner 320 U. S. 489, 64 S. Ct.
239, 88 L. Ed. 248. Section 1141(a) of the Internal
Revenue Code, as amended by Section 36 of Public
Law 773, 80th Congress, Second Session, which be-
came effective on September 1, 1948 provides :
"The Circuit ('ourts of Apj)eals and the United
States Court of Appeals for the District of
Columbia shall have exclusive jurisdiction to re-
view the decisions of the Tax Coui-t, except as
14
provided in Section 1254 of Title 28 of the United
States Code, in the same manner and to the same
extent as decisions of the district courts in civil
actions tried without a jury; * * *'' (Italics sup-
plied.)
Appellate courts have full power to review conclu-
sions of law of the trial Court and also have power to
review findings of fact subject to the limitation con-
tained in Rule 52(a) of the Rules of Civil Procedure
for the District Courts of the United States which
provides ' ' * * * Findings of fact shall not be set aside
unless clearly erroneous, and due regard shall be given
to the opportunity of the trial Court to judge of the
credibility of the witnesses". While, under the above
rule, the appellate courts have refused to set aside
pure findings of fact of the trial Court, supported
by substantial evidence, the courts have generally
held that appellate courts have full power to review
and set aside findings which are leased upon a mis-
application of misinterpretation of the law to the
evidentiary findings and are not bound by the trial
Courts' inferences and conclusions drawn from un-
disputed evidentiary facts.
Knhn v. Princess J Ad a of Thurn <i' Taxis, 3 Cir.,
1941, 119 F (2d) 704; Compana Corp. v. Harrison,
7 Cir., 1940, 114 F (2d) 400; United States v. Arma-
ture Rewinding Co., 8 C^ir., 1942, 124 F (2d) 589.
In the recent decision of United States v. United
States Gypsum, Co., 1948, 833 U. S. 364, 92 L Ed (Ad.
Op.) 552, 68 S. Ct. 525, the United States Supreme
Court set aside numerous findings of fact of the dis-
15
trict Court after a careful and extensive review of
the evidence on the ground that the findings were
clearly erroneous. The Supreme Court defined the
meaning of "clearly erroneous" as used in Rule 52(a)
(supra) as follows:
^'A finding is ^clearly erroneous' lohen although
there is evidence to support it, the reviewing
court on the entire evidence is left with the
definite and firm conviction that a, mistake has
been committed." (Italics supplied.)
As stated above petitioner is not challenging the
facts set forth in the Tax Court's findings of fact but
does contend that the ultimate conclusions of the Tax
Court are clearly erroneous, are based upon infer-
ences and interpi'etations of the evidence which are
not supported or justified by the facts and upon mis-
interpretations of applicable principles of law. This
Court has full power to review conclusions of law
of the Tax Court and under the law as amended and
the above cited decisions has power to review findings
of fact and may set aside findings of fact as clearly
erroneous if upon the entire evidence the Court is of
the definite and firm conviction that the Tax Court
committed a mistake.
16
II. AT LEAST $100,000 OF THE CONSIDERATION RECEIVED BY
PETITIONER FOR THE ASSETS OF ITS WINERY BUSINESS
WAS RECEIVED BY PETITIONER FOR THE GOOD WILL OF
ITS SAID BUSINESS AND CONSTITUTED CAPITAL GAIN.
(a) Summary of pertinent facts.
One of the questions x^resented to and decided by
the Tax Court was whether any part of the considera-
tion received by petitioner upon the sale of the assets
of its winery business was received for the good will
of said business. In its opinion (R. 27), the Tax
Court stated that it was unable to find that petitioner
sold anything not covered by the sale contract (Stip.
of Facts, Ex. 2-B) (R. 111). In order that petition-
er's contentions with regard to this issue may be
clearly understood it is necessary to summarize the
facts.
In 1942 and i)rior thereto petitioner was engaged in
various business enterprises including farming, cattle
raising, manufacture and sale of ice, cold storage,
manufacture and sale of beer and the manufacture
and sale of wine. (R. 20, 104.) Petitioner entered
the wine business in 1921 when it acquired the DeTurk
Winery which had been constructed in 1876 and had
been continuously operated under that name at the
same location. Petitioner continued in the wine busi-
ness under the name of DeTurk Winery until the end
of 1942 and operated said business as ,a separate en-
terprise from its other operations. (R. 104.) The
wine produced and sold by petitioner under the name
of the DeTurk Winery was of })etter than average
quality and enjoyed a good reputation. (R. 20, 43.)
17
Likewise the operation of the Avineiy was successful
and produced a good income. (R. 21, 121.)
Sometime prior to October, 1942, petitioner decided
to go out of the wine business and reduced its wine
i:)roduction in 1942 from a normal 200,000 gallons to
4959 gallons which it extracted entirely from grapes
grown by it. (R. 21, 105.) Mr. Joseph T. Grace, who
was the sole stockholder, president and active mana-
ger of petitioner's business affairs talked to different
people about the sale of the wine business and in No-
vember, 1942, he advised Mr. Ij. A. Weller, vice-presi-
dent of Grarrett & Co., Inc., of New York, that peti-
tioner intended to dispose of its wine business. Mr.
G-race advised Mr. Weller that the winery was worth
$125,000 and that the inventory and good will were
w^orth $250,000, making a total of $375,000 for every-
thing. In determining that the wine inventory and
good will were worth $250,000 Mr. Grace estimated
that the wine could be sold at current prices for
approximately $150,000 and he valued the good will
at $100,000. (R. 54.)
At another meeting shortly thereafter Mr. Weller
inquired as to whether petitioner would lease its win-
ery and stated, "/ can give you tvhat you ask for your
wine inventory and everything that goes with it, the
good will, which would he ecpvivalent to i'ji250,000. * * *
If I give you fifty cents a gallon, that will give yon
what you are asking/' (R. 56.)
Thereafter there were a series of telegrams and
conversations between the parties which referred pri-
18
marily to wine and which finally resulted in an agree-
ment whicli provided for the sale of petitioner's wine
(approximately 520,000 gallons at fifty cents per
gallon plus a small additional amount for wine which
had a higher sugar content than that required by
California standards), and the lease of the winery
and equipment for a term of five years with the right
of renewal at an annual rental of $10,000 per year. On
December 31, 1942, petitioner delivered 104,000 gallons
of wine and received $54,000 therefor. In 1943 peti-
tioner delivered the remaining 418,761 gallons of wine
and received $219,179.91. Petitioner also transferred
to Garrett & Co. its wine stocks, its cooperage, its
labels, its list of customers and its staff of eight or
ten experienced emploj^ees and surrendered its permit
to manufacture and sell wine so that Garrett & Co.
could procure a pennit to operate on the premises.
Thereafter neither petitioner nor Mr. Grace engaged
in making or selling wine. (R. 22-24.)
The record in this case leaves no room for doubt
that the winery business of petitioner, which was
separately operated under the name of DeTurk Win-
ery, possessed good will which had a substantial value.
The good reputation of the product, the earnings of
the business and the testimony of qualified witnesses
all establish that fact. Mr. Morrow, who had been
engaged in the wine business for fifty-five years and
who was thoroughly familiar with petitioner's wine
and business, testified that petitioner's wine business
had a substatntial going concern or good will value.
(R. 44, 45.) Mr. Grace, the president and active man-
19
ager of petitioner, valued the good will of petitioner's
wine business at $100,000 (R. 55, 60) and Mr. Tapp,
an experienced banker, with extensive experience in
and knowledge of the wine business, testified that a
business such as that of the DeTurk Winery would
have a good will value of approximately $160,000.
(R. 99.) There is also a legal presumption that a
profitable business has a good Avill or going concern
value over and above the value of the tangible assets.
Pfleghar Hardware Specialty Co. v. Blair, 2 Cir.,
1929, 30 F (2d) 614; Helvering v. Security Savings
ayid Commercial Bank, 4 Cir., 1934, 72 F (2d) 874;
White and Wells Co. v. Commissioner, 19 BTA 416;
Wyman and Co. v. Commissioner, 8 BTA 408. See
also Randolph Paid, Federal Estate and Gift Taxa-
tion, Vol. 2, p. 1242.
The Tax Court did not question the fact that there
was a substantial good will value in petitioner's win-
ery business, but based its decision upon the deter-
mination that the transaction between petitioner and
Garrett & Company did not involve the sale of peti-
tioner's good will and that the entire consideration
received by petitioner was paid to it for the wine
inventory. The i)etitioner contends that the deter-
mination of the Tax Court that no part of the con-
sideration received by j^etitioner was received by it
for its good will or going concern value is not sup-
ported by the evidence in the record or the applicable
principles of law.
20
(b) The evidence establishes that petitioner intended to and
actually did sell its good will.
The uncontradicted testimony of Mr. Grace, who
represented petitioner in the negotiations, was that
petitioner would not sell its wine inventory except as
a part of the sale of all the assets of the winery busi-
ness, including the good will which he valued at $100,-
000, and he so advised the purchaser. (R. 53, 54.)
The purchaser offered to lease the winery instead of
purchasing it and offered to purchase the wine at a
price which would give petitioner an amount equal to
the price at which the wine, the good will and the
other assets had been included in petitioner's original
offer. (R. 56.) Thereafter, the telegrams which
passed between the parties and the final letter which
evidenced the agreement referred only to the wine
and established the total consideration on the basis
of the wine transferred. The evidence clearly estab-
lishes, however, that despite the wording of the tele-
grams and the agreement letter, petitioner actually
transferred and delivered to Garrett & Co. by sale
and lease, not only wine, but also all the other assets
of its wine business, including its lal^els and list of
customers, transferred its staff of experienced em-
ployees to Garrett & Co. and surrendered its permit
to manufacture and sell wine so that Garrett & Co.
could procure a permit to operate on the premises.
Upon the completion of the transaction Garrett &
Co. owned all of the assets, tangible and intangible,
which petitioner had formerly owned and used in its
wine business, except the winery and equipment, and
21
Garrett & Co. had a five year lease of the plant and
equipment with the right of renewal. The above
facts are not disputed and were found by the Tax
Court. These undisputed facts clearly establish that
despite the form of the transaction and the phraseol-
ogy of the telegrams, the effect of the transaction was
the transfer of the entire wine lousiness and all of
the assets thereof to Cxarrett & Co. The uncontradicted
testimony of Mr. Grace also clearly establishes that
it was the intention and understanding of petitioner
that all of the assets, including the good will, Avere
being sold and that the sale would not have been
made on any other terms. (R. 53, 56.)
In its opinion the Tax Court specifically refers to
the testimony of Mr. Grace with regard to the terms
of the offer of sale which included $100,000 for peti-
tioner's good Avill but concluded, "We cannot find
such an offer upon the e\ndence adduced." (R. 25.)
The refusal of the Tax Court to give any weight or
consideration to the uncontradicted testimony of Mr.
Grace constituted reversible error. For an v. Commis-
sioner, 5 Cir., 1948, 165 F (2d) 409; TaU v. Commis-
sioner, 5 Cir., 1948, 166 F (2d) 697.
Furthermore, the consideration received by peti-
tioner, while technically com])uted on the basis of the
wine transferred, was approximately the amount
which petitioner requested for all of the assets which
it sold, including its good will, and exceeded the price
asked for the wine by more than $100,000. After the
conclusion of the ti-ansaction petitioner had surren-
dered its permit to manufacture and sell wine and
22
had retained no part of the wine business or the
assets thereof, except title to the winery and equip-
ment which had been leased for five years, with right
of renewal. By the transfers petitioner completely
disposed of the good will of its winery business and
the only logical and fair conclusion from all the evi-
dence is that a portion of the consideration was re-
ceived by petitioner for its good will.
(c) Applicable decisions establish a legal presumption that peti-
tioner sold its good will when it sold its business.
The above conclusion is further supported by Court
decisions which hold that the sale of a going business
necessarily involves a sale of the good will of the
business even though the good will is not specifically
transferred or even mentioned in the contract between
the parties. White cO Wells Co. v. Commissioner ^ 19
BTA 416, 2 Cir., 1931, 50 F. (2d) 120; Pfleghar
Hardware Specialty Co. v. Blair, 2 Cir., 1929, 30 F.
(2d) 614; Betts v. United States, 62 Ct. Cls. 1.
In Didlake v. Roden Grocery Co., 160 Ala. 484, 495,
49 So. 384, 387, the Court stated:
u* * * -g^^^ ^j^^ authorities are clear to the effect
that, if a business is sold out entirely and nothing
is said about good will, it goes with the property.
This necessarily results from the fact that the
good Avill cannot exist except in comiection with
the business."
White d- Wells Co. v. Commissioner (supra) and
Pfleghar Hardware Specialty Co. v. Blair (supra)
are almost identical in all material respects with the
present case and in each of said cases it was held that
23
there was a sale of the good will of the business even
though the contract of sale made no mention of good
will and the ti'ansactions wei'e in form mere sales of
tangible assets.
White cC* Wells Co. v. Commissioner (supra) is
exactly in point, and because this case seems undis-
tinguisha])le and appears to l)e uncontrovertible au-
thority to support a decision in favor of this peti-
tioner, a review of that case follows:
White & Wells Co. operated two factories manu-
facturing paper boxes. The boxes manufactured in
one of the factories were sold almost exclusiA^ely
to two rubber companies. After a number of years,
White & Wells Co. decided to sell this factory and
finally did sell it to one of the rubber companies. It
was not the intention of the rubber company to go
into the paper box business or sell boxes to the public,
but merely to manufacture them for use in its own
business. The contract of sale entered into between
White & Wells Co. and the rubber company specified
only the sale of the land, buildings and equipment.
The taxpayer contended that when it sold the factory,
it sold a going business to which there was attached
certain good will value and it should therefore be
allowed to set up as part of the cost basis a March 1,
1913, value for the good will in determining the profit
or loss from the sale. The Government contended
that the good will was not sold and in the alternative
objected to the taxpayer's computation of the good
wdll vahie. The Board states the Commissioner's con-
tentions as follows;
24
"In this proceeding, the respondent attempts
to differentiate the Pfleghar Hardtvare Specialty
Co. case from the instant case since in the former,
the company sold its plant and went out of busi-
ness, whereas, in the instant proceeding, the peti-
tioner sold only one of its factories and continued
in the general paper box business. It is further
contended that the United States Rubber Co. did
not buy the good will of the petitioner or of the
Naugatuck Factory because the Naugatuck Fac-
tory was designed especially for manufacturing
supplies for the rubber company; that it was not
necessary for the I'ubber company to buy any
good will of the plant. ^'
The Board after concluding that ''If is to he as-
sumed that the manufacturer doing a profitable busi-
ness will not sell his plant at any date for the residual
value of its tangibles*' (italics supplied) determined
that there was a disi)osition of intangible value in
the transaction and that in computing profit from the
sale of the factory, the March 1, 1913, value of the
intanagible assets should be considered as part of the
basis. The final and concluding paragraph of the
Board's decision is significant in that it recognizes
without question that even though the formality of
the sale involved only the sale of the tangible prop-
erty, there was, nevertheless, to be recognized as in-
herent in the transaction, a disposition of the intan-
gible or going business value of the tangible property,
and that final paragraph reads as follows :
''From a consideration of the entire record, we
reach the conclusion that the going concern value
of the petitioner's Naugatuck Factory on March
25
1, 1913, was the amount of $31,441.60, which
amount added to the residual value of the tangi-
bles of $67,904.86, gives a basis for the determina-
tion of the profit upon the sale of the Naugatuck
Factory of $99,346.46. Since such factory was
sold in 1920 for $150,000 cash, the profit realized
upon the sale was $50,653.54."
This case was appealed to the United States Circuit
Court of Appeals for the Second C'ircuit, e^O Fed. (2d)
1209, and that Court agreed with the determination
that the good will was sold but remanded the case
back to the Board with instructions that in using
earnings for an average period of years for the pur-
pose of computing the value of the good will, the
Board should include within the period certain years
in which good earnings were realized in order that
the period as a whole would refiect a fair average and
measure for the valuing of the good will.
Just this recital of the White d Wells Co. case is
sufficient to show its i-esemblance to present case. This
case is even stronger in that there is ample evidence
in the record that the petitioner intended to dispose of
its intangible assets and included a price for those
assets in the overall price which it quoted Garrett &
Co. for the entire lousiness and which it finally re-
ceived in the transaction, and petitioner never re-
engaged in the winery business.
In Pfieghar Hardware SpeciaUy Co. v. Blair
(supra) the Pfieghm* company was engaged in the
business of manufacturing and selling articles of
hardware. It liad one principal customer which pur-
26
chased 90 7o of its output and which sold the articles
purchased under its own name and not under the
name of Pfleghar. In 1919 the customer purchased
Pfleghar Company's j)lant and equipment, exclusive
of inventory, as a whole as a going concern for
$300,000. Pfleghar contended that it sold its good
will and was entitled to include the March 1, 1913
value of the good will as a part of its cost in com-
puting its profit on the sale. The Commissioner con-
tended that there was no sale of good will in 1919
and that Pfleghar had no good mil of value in 1913.
The Board of Tax Appeals held for the Commissioner
on the groud that while whatever intangible asset
Pfleghar owned was transferred to the purchaser the
evidence did not establish any value for good will in
1913. On appeal the Circuit Court for the Second
Circuit reversed the decision of the Board of Tax
Appeals on the grounds that the taxpayer had good
will of value in 1913 and that since the subject of
the sale was a manufacturing plant in production as a
going concern the seller sold its good will.
In each of the cases discussed above the contracts
of sale made no mention of good mil, the good will
of the seller was of no apparent value to the pur-
chaser and the Commissioner contended, as in this
case, that there was no sale of good mil. The Courts
held, however, that since the transactions involved
the transfer of a going business the good will of the
seller was included among the assets sold.
The principle of the above cases is directly applic-
able to the present case. As shown above petitioner
2t
transferred its entire ])usiness as a going concern,
inclnding its staff of experienced employees, to Garrett
& Co., retained no part of the business and thereafter
completely ceased all operations in the wine business.
Such a transfer of an entire Imsiness necessarily in-
cludes the transfer of the good will of the seller
regardless of the terms of the contract of sale.
(d) The grounds and reasons relied upon by the Tax Court are
not supported by the evidence and are contrary to the ap-
plicable principles of law.
The Tax Court based its decision herein primarily
upon the fact that the telegrams between the parties
did not suggest an intention to sell the winery, the
fact that the winery was leased and not sold, the
fact that the final price was computed on the basis
of the wine transferred and the Court's belief that
Garrett & Co. would not have paid $100,000 for good
will which the Court considered that it abandoned a
little over a year later by canceling the lease. (R.
25-28.) None of the points relied upon by the Tax
Court are suiftcient to justifj^ a determination that
petitioner did not sell its good will or to distinguish
White &j Wells Co. v. (' omrmssioner (supra) or
Pfleghar Hardware Specialties Co. v. Blair (supra.)
The decision of the Tax Court also appears to be
based to a large extent upon the assumption that there
can be no sale of a business as a going concern or of
the good mil of a business unless the transaction
includes the sah' of the physical plant. The Tax
Court clearly confused the business with the plant
for the Court states "We should be impressed by this
28
argument (that there was a sale of a going business
and such sale necessarily included a transfer of the
good will) if there had been a sale as in the cited
cases [White & Wells Co. v. Commissioner (supra)
and Pfleghar Hardware Specialties Co. v. Blair
(supra)], Imt under the facts here showm the advan-
tages of what ever good will was inherent in peti-
tioner's business passed to Garrett & Co. by lease,
not by sale, * * *". (R. 26.) The basic assumption
of the quoted statement, that there cannot be a sale
of a going business unless the physical plant is sold
is obviously fallacious. Good will is seldom inherent
in a plant and equipment except possibly where loca-
tion is the principal element of the good mil. Like-
wise the abandonment or sale of the plant and equip-
ment without a transfer of the business itself does
not effect an abandonment or transfer of the good will
of the business. Wm. Wailes v. Commissioner, 25
BTA 278.
There are many businesses with valuable good will
which do not own the plant and equipment used and
it is by no means unusual for one concern to buy
the business and good will of another concern without
buying or even leasing the physical plant and equip-
ment of the seller. It so happened that in White S
Wells Co. V. Commissioner (supra) and in Pfleghar
Harchvare Specialties Co. v. Blair (supra) the plants
and equipment were sold, but that fact does not
appear to have any important bearing upon the deci-
sions in those cases.
29
In the present ease tliere was nnich more than a
mere sale of merchandise and a lease of the plant
and eqnipment as stated hy the Tax Court. Petitioner
transferred its entire inventory of wines, its labels,
its customer list, its employees, and it surrendered
its permit to engage in the wine Inisiness and gave the
purchaser a five year lease with right of renewal of
the plant and equipment. Petitioner retained no part
of its wine business and did not again engage in that
business. Petitioner's intention to completely dis-
pose of its wine business is corroborated by the fact
that a year later it sold the plant and equipment and
thereby disposed of the last interest it held in assets
formerly used in the business. The leasing of peti-
tioner's plant and equipment in connection mth the
sale and transfer of all the other assets was as effec-
tive for all practical purposes as a sale would have
been and the fact that the plant was not sold does
not make the rule of the above cited cases inapplicable,
nor justify the conclusion that petitioner did not sell
its entire business, including its good will.
The fact that the telegrams between the parties
and the contract letter referred only to wine and the
final price was based upon the quantity of wine
transferred is of little importance when considered
with all the evidence. Mr. Grace testified that he
advised Mr. Weller that petitioner would not sell its
wine except as a part of a sale of the entire business
and all ol' the assets thereof, including the good will
and he quoted a price of $375,000 which consisted
of $125,000 for the plant and equipment, $150,000
30
for the mne inventory, and $100,000 for the good will.
(R. 53-5i.) !Mr. Weller offered to lease the plant
and stated that Garrett & Co. could give petitioner its
price for the remaining assets by paying 50^ per
gallon for the wine. (R. 56.) As petitioner was will-
ing to lease its plant in connection with the sale of
the other assets of the Imsiness and the purchaser
was willing to pay the price petitioner asked, the
method employed in determining the price was obvi-
ously of no great importance to petitioner. Mr. Grace
testified that he felt that petitioner was getting the
price it was asking for the good will, the organization
and all that. (R. 56.)
The conclusion that the transaction between peti-
tioner and Garrett & Co. was merely a sale of wine
can be reached only ])y ignoring all the evidence
except the written communications and refusing to
interpret the written documents in the light of the
intention and understanding of the seller, the actual
performance and the eifect of the entire transaction.
While the trial Court has broad powers in determin-
ing the facts of a case and interpreting the evidence,
it cannot ignore comj)etent evidence and base its deter-
mination upon a small portion of the evidence. United
States V. United States Gypsum Co., 1948, 333 U. S.
364, 92 L. Ed. (Ad. Op.) 552, 68 Sup. Ct. 525; Fleming
V. Palmer, 3 Cir., 1941, 123 F. (2d) 749; Belridge Oil
Co. V. {Jommissioner, 9 Cir., 1936, 85 F. (2d) 762.
The Tax Court also based its determination to a
large extent upon its belief that Garrett & Co ^' would
not have paid $100,000 * * * to obtain good will which
31
it abandoned a little oA'er a year later by canceling
the lease* * *." There is nothing whatsoever in the
record to justify such belief, and the Tax Court has
no power to substitute its .ludgment as to the sagacity
of a business transaction for that of the parties. See
Belridge Oil Co. v. Commissi oner (supra). Further
more, the mere abandonment of a plant in connection
with the transfer of the business to another location
does not constitute an abandonment of good will. Wm.
Wailes v. Commissioner, 25 BTA 278.
The Tax Court's belief in this regard was obviously
influenced ])y its erroneous assumption that good will
attaches to and is inseparable from the physical plant
employed in the ])usiness.
While it may be that Garrett & Co. had no imme-
diate need or desire for petitioner's good will, the
same could be said of the purchasers in White d-
Wells Co. V. Commissioner (supra) and Pfleghar
Hardware Specialties Co. v. Blair (supra), and it does
not follow that the good will was not sold and trans-
ferred along with the other assets. The record does
clearly estal)lish that petitioner intended and under-
stood that its good will was being sold and would not
have entered into the transaction on any other basis
and that the purchaser was so advised. The record
also estal)1ishes that the price ])aid was approximately
the amomit asked by petitioner for all the assets
sold including its good will. We are here concerned
with pc^titioner's incomes and tax lia])ility which must
))e determined on the )>asis oF the assets which peti-
tioner sold and transferred and not on the basis of
32
what the purchaser wanted or what it did with the
assets after the purchase.
In the case of Ida P. Hugc/his, 1 T. C. 1214, P. H.
T. C. Memo, Dec. Vol. 12, H 43172, petitioner owned
a piece of property imj^roved with a building from
which she was obtaining rentals. Sears Roebuck
wanted the land for the erection of a retail store but
had no use for the buliding. Sears Roebuck purchased
the property for a lump sum payment and immedi-
ately demolished the building. The petitioner argued
that since Sears Roe])uck wanted only the land prac-
tically the entire sales price should be allocated as
the selling price of the land, and only an amount
equal to the junk value of the building should be
allocated as the selling price of the building. Since
the gain on the land was a capital gain and the loss
on the l)uilding an ordinary loss the petitioner would
have effected a tax saving if her contention had been
sustained. The Tax Court in sustaining the Com-
missioner rejected her contention, and pointed out
that in determining her tax liability the transaction
must be analyzed from her point of view or from a
reasonal^le construction of the transaction as it
affected her regardless of the jjurposes or objectives
intended ])y the other party to the transaction. The
Tax Court pointed out that the building was an in-
come producing assets and it was reasonable to assimie
that the petitioner would not have disposed of an
income producing asset without receiving some con-
sideration for it and the Court therefore allocated
a fair portion of the selling price as the selling price
33
of the ))uilding regardless of the fact that Sears
Roebuck from its point of view probably paid the
entire price for the land alone.
In principle, the same situation exists in the instant
case. It can l)e assumed for the moment that in the
transaction here involved, Garrett & Co. was primarly
interested in obtaining a stock of good wines and a
going plant, as distinguished from a going manu-
facturing business. The sale of the wine alone would
have meant tlie end of the DeTurk Winery business
and the taxpayer indicated (piite clearly that it
wanted to sell its wine business and that it would
not dispose of the wine without disposing of the entire
winery lousiness inchiding the plant and the good will.
The petitioner is contending here exactl.y what the
Government contended in the Ida P. Huggins case,
supra, namely, that insofar as the petitioner was
concerned, it was disposing of one of its income
producing assets, its good will or going concern value,
and part of the selling price should be allocated to
that asset. If the principle of the Ida P. Huggins
case is sound it must ])e concluded that this petitioner
would not have entered into a transaction involving
the disposition of its wine business without receiv-
ing consideration for the good will thereof which
was one of the income producing assets of sub-
stantial value to the petitioner, and therefore some
part of the price received from Garrett & Co. should
be allocated as being received for that asset, and
it must be concluded further that this allocation
34
should be made regardless of how Garrett & Co.
handled the transaction.
Petitioner submits that the principle of Tda P.
Hug gins (supra) is directly applicable to this case
and that the issues presented must be determined
by interpreting the transaction as it applied to peti-
tioner without I'egard to what the purchaser may
have wanted out of the transaction. Whether or not
Garrett & Co. would have paid $100,000 or anything
at all for petitioner's good will as such is immaterial.
The important fact is that petitioner would not have
sold its business or assets piecemeal, insisted that
its good will ])e purchased along with the other
assets of the business and actually received the total
price it asked for all of its assets, including its good
will. When all the facts and circumstances are con-
sidered the only reasonable conclusion is that peti-
tioner sold its entire wine business including its good
will.
The opinion of the Tax Court clearly discloses that
in reaching the conclusion that the transaction be-
tween petitioner and Garrett & Co. was merely a sale
of wine and a lease of the plant and equipment the
Court completely ignored the uncontradicted testi-
mony of Mr. Grace as to the intention and under-
standing of petitioner, completely ignored the sub-
stance and effect of the transaction as a whole,
completely disregarded the principle of White rf;
Wells Co. V. Commissioner (supra) and Pfleghar
Hardivare Specialties Co. v. Blair (supra) and based
35
its conclusion entirely upon the form of the written
documents and the erroneous assumption that there
cannot be a sale of good will of a business without
a sale and transfer of the physical plant and equip-
ment. It is respectfully sul^mitted that the Tax Court
erred as a matter of law in disregarding the uncon-
tradicted testimony of a competent and well qualified
witness, in refusing to give any consideration and
weight to the substance and effect of the entire trans-
action and in Imsing its conclusion entirely upon the
form and wording of the written communications and
the formal contract and upon inferences and assump-
tions not supported l^y the evidence or l)y established
principles of law.
(e) The facts and evidence establish that at least $100,000 of the
consideration received should be allocated to the good will.
As the Tax Court concluded that the transaction
between petitioner and Garrett & Co. did not include
a sale of the good will it did not consider the allo-
cation of the consideration received by petitioner
between the good will and the assets sold. The record
does contain facts and evidence from which a fair
allocation of the consideration can be made.
Mr. Cxrace testified that at the inception of the
negotiations he quoted to Mr. Weller a total price of
$375,000 which was composed of $125,000 for the
plant and equipment, $150,000 for the wine inventory
and $100,000 for the good will (R. 54.) He further
testified that he determined the value of the wine
inventory at the price for which it could have been
36
sold in the regular course of business and determined
the vahie of the good will at five times normal earn-
ings (R. 60.) The elimination of the plant and
equipment from the assets being sold reduced the
total consideration asked to the $250,000 asked for
the wine and good will. The price finall}^ agreed
upon and received was $271,179.91.
The Stipulation of Facts (par. 6, R. 104) shows
that the average price at which the DeTurk Winery
had been selling its wine in the year 1942 was 22.2^
per gallon for dry wine and 36.8^ per gallon for sweet
wine. The wine involved in the sale to Garrett & Co.
w^as 352,635 gallons of dry wine and 170,126 gallons
of sweet wine. (R. 105.) By applying the average
prices to the gallonage the amount which DeTurk
Winery would have received would have been $150,-
891.34 almost the exact amount estimated by Mr.
Grace.
The Tax Court attached signifiance to the fact
that petitioner did not introduce evidence to show
the market price of the wine in December, 1942. The
purpose of the stipulation with regard to the average
selling price of the wine in 1942 was to establish the
market value of the wine and the price at which it
could have been sold in the regular course of busi-
ness. In agreeing to the stipulation of the average
price at w^hich the wine was sold in 1942 respondent
was necessarily fully informed of the price at which
wine was sold in December, 1942. If that price had
been appreciably higher than the average price for
the year there can be no doubt that respondent would
37
have iiitvodiiced such fact in evidence. Also it is
obvious that Mr. Grace was familiar v^ith the price
in Decem])er, 1942 and his estimate of the price is
consistent with the average ])rice for the year. The
stipulated average price and res])ondent's failure to
suggest that the price was higher in December, 1942
together with his failure to challenge Mr. Grace's
estimate of the price at which the wine could have
been sold in the regular course of business should
satisfactorily establish that the value of the wine in
December of 1942 was not appreciably greater than
the average price for the year.
Mr. Grace's allocation of $100,000 of the considera-
tion to good will should be acceptable by the Court.
There can be no doubt as to his qualification to place
a value on the good will. He was exj3erienced in the
business and was the one who actually determined the
price at Avhich the assets would be sold. Further-
more, his valuation of the other principal assets,
namely the wine at $150,000 and the plant at $125,000,
are shown to be reasonable and accurate on the basis
of actual sales. Mr. Grace's allocation is further
corroborated by the testimony of Mr. Tapp who
testified that the good will of the DeTurk Winery
business was approximately $160,000 (R. 99.)
Petitioner respectfully submits that the record con-
tains ample evidence from which a fair allocation of
a portion of tlie consideration to the good will can
be made and that tiie evidence clearly shows that at
least $100,000 of the consideration should be allo-
cated to the good will.
38
(f) The determination of the Tax Court that no part of the con-
sideration received by petitioner was received for the g-ood
will of its winery business was clearly erroneous and should
be reversed.
The stipulated facts and other eA^dence presented
to the Tax Court clearl}^ establish that the winery
business of petitioner had a substantial good will or
going concern value. The evidence also establishes
that in the transaction with Garrett & Co. petitioner
sold and transferred its entire wine business and
retained only the reversionary interest in its plant
and equipment. The Courts have recognized that
the transfer of a going business necessarily involves
the transfer of the good will of the business and have
held that as a matter of law such a sale involves the
sale of the good will even though it is not mentioned
in the contract and even though the purchaser may
have no apparent need or desire for the good will.
The Courts have also recognized that the seller would
not part with its good mil without receiving consid-
eration therefor and have held that part of the con-
sideration must be allocated to the good will even
though the contract of sale bases the price entirely
upon the tangible assets transferred.
In the present case, in addition to the foregoing
factors, the uncontradicted testimony of Mr. Grace,
establishes that it was intended and understood that
l^etitioner should receive approximately $100,000 for
its good will and that petitioner would not have
entered into the transaction on any other basis.
In rendering its decision herein the Tax Court
completely disregarded all of the above evidence and
39
the applicable principles of law estal)lished by Court
decisions and determined that no part of the consid-
eration received by it was received for its good will
or going- concern value. Petitioner respectfully sub-
mits that the determination of the Tax C^ourt is not
supported by the evidence or the applicable principles
of law and that Jjaid determination is clearly erroneous
and should be reversed.
III. THE DE TURK WINERY BUSINESS WAS A DISTINCT BUSI-
NESS UNIT OF PETITIONER AND GAIN DERIVED FROM
THE SALE OF THAT UNITARY BUSINESS IS A CAPITAL
GAIN.
The evidejice establishes that the DeTurk Winery
business consisting of the manufacture and sale of
wines, was one of several different Inisiness opera-
tions in which the petitioner was engaged (R. 49,
50, 104.)
In the case of Graham Mill and Elevator Co. v.
Thomas, 6 Cir., 1945, 152 F. (2d) 564, a corporation
sold all of the assets making up four of its branch
operations. The Court in sustaining the Commis-
sioner and the District Court, held that a branch
operation is a business entity and the sale resulted
in a capital gain, though individual assets of the
branch included inventor}^ and other non-capital
assets. The Court observed that since the sale was
not made in the course of htisiness to customers hut
was a pari of the ending of the business, the trans-
action constituted a sale of capital assets.
40
The day after the above case was decided the
U. S. Circuit Court of Appeals for the Second Cir-
cuit decided the case of WilUams v. McGowan, 2 Cir.
152 F (2d) 570. In that case a surviving partner
sold the business once conducted by the partnership.
The District Court held that the sale was a sale of
a business entity and any gain derivgi therefrom was
capital gain. The Circuit Court, one Judge dissent-
ing and agreeing with the District Court, held that
the taxpayer had acquired the business and property
of the partnership upon the death of his partner and
had not sold the partnership interest as a distinct
interest but had sold the individual assets, and gain
or loss had to be computed as to each asset. The
Court did recognize that a partner's interest in a going
firm is for tax purposes to be regarded as a *' capital
asset" {citing Stilgenhaur v. United States 9 Cir.,
115 F (2d) 283, 25 AFTR 966 and other cases.)
The distinction lietween the Graham Mill case,
supra and the William case, supra, may be indicated
by a remark made ])y the Tax Court in the case of
James H. Adamson T. C. Memo Docket 3154, decided
December 11, 1946 which case was cited with ai)proval
in the case of United States v. Adamson, 9 Cir., 1947,
161 F (2d) 942, as follows:
"... we think it cannot be said that this peti-
tioner . . . sold his partnership interest as such,
at least not in the sense that one sells an interest
in a * going concern^'' (Italics ours.)
It would appear from the reasoning in the Graham
Mill case, supra, from the dissenting opinion in the
41
Williams case, supra, and from the Adamson case,
supra, that if a taxpayer disposes of a going concern
as such, it disposes of a capital asset entity for tax
purposes, without regard to the asset comjjonents
thereof, and an^^ gain resulting from the transaction
is taxable as a capital gain. It is emphasized that
this tvas the very principle which the Commissioner
advanced in the Graham Mill case when it meant more
tax to have the transaction treated as a capital asset
transaction. Since the District Court and the Circuit
Court of Appeals sustained the Commissioner, he
should he forced to adhere to his position and should
not he permitted to hlotv hot and cold depending upon
hotv the tax is affected.
It is respectfully submitted that since the petitioner
disposed of the DeTurk Winery business as a ''going
concern," which it had conducted for many years,
the entire profit from the transaction mth Garrett
& Co. should be taxed as a long-term capital gain.
The Tax Court dismissed this contention on the
ground that under its construction of the transaction
there was not a sale of the business as a unit but a
mere sale of wine and barrels and a lease of the
winery. Foi* the reason set forth in the preceding
section of this brief petitioner submits that the trans-
action between petitioner and Garrett & Co. was
intended to be and actually was a sale of petitioner's
entire winery business and was not a mere sale of
wine and Imrrels. Petitioner further submits that
the Tax Court erred in determining that the trans-
42
action was not a sale of the entire business as a unit
the gain from which constituted long term capital
gain under the authorities cited.
IV. PETITIONER'S INVENTORY OF WINE WAS CONVERTED
INTO A CAPITAL ASSET WHEN PETITIONER DETERMINED
TO DISPOSE OF ITS WINERY BUSINESS AND THE ASSETS
THEREOF AND THE GAIN REALIZED UPON THE SALE
CONSTITUTED LONG TERM CAPITAL GAIN.
The record establislies that in 1942 j^ist prior to
the crushing season — October and November — the
petitioner decided to sell its winery business. The
record indicates that though it manufactured but
4,959 gallons of wine in 1942, compared with a usual
annual production of approximately 200,000 gallons
of wine, it continued to conduct its business and sold
wines up to Januar}^ 1, 1943 (R. 104.) The record
indicates that in Jamuiry, sometime prior to January
20, 1943, the petitioner did transfer everything con-
nected with its winery business to Garrett & Co.
The question arises, did the item of mne inventory
which had been an inventory asset held for sale to
customers in the ordinary course of business lose
that characteristic and become a capital assets prior
to the sale to Garrett & Co.
It appears that whether or not a sale or exchange
involves a capital asset depends upon the nature of
the asset at the time of the sale or exchange. The
Commissioner's regulations, Regulation 111, Sec.
29.117-1 concede this specifically as to certain types
43
of capital assets and since the statutory definition
of capital asset is the same as to all types of capital
assets it would appear that the said regulation would
apply to all types of capital assets.
In the case of Lurie v. CommissUmer, 9 Cir., 1946,
156 (2d) 436, the petitioner held unregistered notes
for over 24 months. Just before the notes were retired
they were put in registered form. As unregistered
notes they were not capital assets, as registered notes
they were. The taxpayer reported the gain on the
retirement as long term capital gain. The Commis-
sioner and the Tax C'ourt treated the gain as ordinary
income because the notes had not been held as regis-
tered notes for the 18 months holding j^eriod to
qualify as long term capital assets. The Circuit Court
reversed the Tax Court holding that so long as the
asset was a capital asset at the time of the sale or
exchange, and as long as it had been held the necessary
period, regardless of whether during that entire period
it was a capital asset, the gain from the sale or
exchange was a long term capital gain under the
statute.
The same principle was a])plied in the case of
Commissioner v. Euleon Jock Grocery, 5 Cir., 1947,
159 F (2d) 324.
It would follow from these decisions, that if the
wine inventory lost its characteristic as an inventory
or stock in trade asset at any time prior to the sale
to Garrett & Co., the gain on the sale of the wine,
excepting on 4,959 gallons manufactured in October,
44
1942, would be taxable as long term capital gain
because all the wine excepting the 4,959 gallons, was
held over 6 months. The question arises as to whether
the wine did change its characteristic prior to the
sale to Garrett & Co.
The authorities are consistent in the proposition
that where a taxpayer is no longer carrying on a
business the assets which previously qualified as busi-
ness assets or stock in trade, lose their characteristic
as such and become capital assets.
In the Adamson case, T. C. Memo, supra, the Tax
Court held that property which constituted stock in
trade of a partnership was no longer stock in trade
after the partnership had gone out of l)usiness and
the property was being held for '^ division and
distribution."
In Three States Lumber Co. 7 Cir., 1946, 158 F
(2d) 61, the Court in reversing the Tax Court held
that in a case where the taxpayer had quit the lumber
business and was selling its timber in "activities in-
cidental to an orderly liquidation" the timber was
no longer property held primarily for sale to cus-
tomers in the ordinary course of business but was a
capital asset.
In the two cases alcove cited there was a sul^stan-
tial lapse of time between the going out of business
and the disposition of the assets, but isn't this just
a matter of degree? If it is the going-out of business,
if it is the change in Inisiness, or if it is the change
from holding of the asset for sale to customers in
45
the ordinary course of business to a holding of it
for sale in some other manner or for some other
purpose, then that change takes effect at the time
the reason for the change takes place, and whether
the asset is sold 10 days or 10 years after the change
becomes effective, the treatment of the sale for tax
purposes would be the same.
In this case tlie petitioner's business of manufacT
turing and selling wine consisted of making wine,
aging it for the customary time of 6 months to 2 years
and then selling it to its trade customers. In con-
ducting this business it always had a stock of salable
wine available while other wine was in the necessary
aging process. The petitioner was not in the })usi-
ness of selling its entire stock of wine at one time,
together with all equipment and cooperage. (Butler
Consol. Coal Co. 6 TC 183.) From January 1, 1943
the time this taxpayer's negotiations with Garrett &
Co. reached the stage where the sale to Garrett &
Co. seemed assured and the petitioner discontinued its
regular business sales, the wine inventory was no
longer held for sale to customers in the ordinary
course of business, but became one of the component
parts of a group of assets which were held for and
later transferred in an isolated transaction, which
was a type of transaction of an entirely different
nature than the transactions theretofore had in the
ordinary course of the business of manufacturing and
selling wine. The sale to Garrett & Co. was not a
sale to a customer in the ordinary course of business,
and therefore when the wine became an asset held for
46
that purpose, whether for one day or 20 days it was
no longer an asset held for sale to customers in the
ordinary course of business.
It is respectfully sul^mitted that the characteristic
of petitioner's stock of wine was changed to a capital
asset when held for sale to Garrett & Co. in an isolated
transaction and therefore excepting as to 4,959 gal-
lons which had not been held for 6 months and the
profit on the sale of which can be computed from the
record the profit on the sale of the wine to Garrett &
Co. should be treated as a long-term capital gain.
Petitioner respectfully submits that the Tax Court
erred in determining that the wine was not couAcrted
into a capital asset prior to the sale to Garrett & Co.
and in determining that the gain from the sale of the
wine was ordinary income.
V. CONCLUSION.
Petitioner respectfully submits:
(1.) That the evidence and authorities cited
and discussed in this brief clearly establish that
in the transaction between petitioner and Garrett
& Co., petitioner sold its entire winery business
including its good will and that at least $100,000
of the consideration received ])y petitioner was
received by it for its good will.
(2.) That since the transaction was a sale of
its entire winery business the entire gain consti-
47
tuted long term capital gain and not ordinary
income.
(3.) That prior to the sale the wine inventory
was converted into a capital asset and the gain
realized from the sale of the mne (except 4,959
gallons) was long term capital gain and not ordi-
nary income.
Petitioner fnrther respectfully submits that the
determination of the Tax Court that the transaction
between petitioner and Garrett & Co. was merely a
sale of wine and barrels and a lease of the winery
and that the entire gain constituted ordinary income
is clearly erroneous and should l)e reversed.
Dated, San Francisco, California,
October 15, 1948.
Respectfully submitted,
George H. Koster,
Bayley Kohlmeier,
Attorneys for Petitioner.
No. 11976
In the United States Court of Appeals
for the Ninth Circuit
Grace Bros., Inc., petitioner
V.
Commissioner of Internal Revenue, respondent
ON PETITION FOR REVIEW OF THE DECISION OF THE TAX.
COURT OF THE UNITED STATES
BRIEF FOR THE RESPONDENT
THERON LAMAR CAUDLE.
Assistant Attorney Gevproi
ELLIS N. SLACK,
S. WALTER SHINE,
Special Assistants to the Attorney General.
k > ^ rf'
1 /' ■>;!(:
<r
INDEX
Page
Opinion below 1
Jurisdiction 1
Questions presented 2
Statute and regulations involved 2
Statement 3
Summary of argument 7
Argument :
The Tax Court correctly held that the taxpayer sold its wine
inventory and leased its winery and that the gain derived
therefrom was ordinary income and not long term capital
gain 8
A. The Tax Court correctly held that no part of the con-
sideration received by the taxpayer was for the sale
of its good will 8
B. The Tax Court correctly held that the sale of the
taxpayer's wine inventory and the lease of its winery
was not the disposition of a "unitary business" 23
C. The Tax Court correctly held that the taxpayer's wine
inventory did not lose its character as stock in trade
or as property held primarily for sale to customers
in the ordinary course of trade or business by virtue
of the taxpayer's decision to discontinue its wine
business 26
Conclusion 29
Appendix 30
CITATIONS
Cases :
Adamason v. Commissioner, decided December 11, 1946 27
Birnhaum v. Commissioner, 117 F. 2d 395 9
Boland v. Commissioner, 118 F. 2d 622 10
Cohen v. Commissioner, 148 F. 2d 336 9
Commissioner v. Boeing, 106 F. 2d 305, certiorari denied, 308
U. S. 619 27
Commissioner v. Gracey, 159 F. 2d 324 28
Foran v. Commissioner, 165 F. 2d 705 9
Gaylord v. Commissioner, 153 F. 2d 408 10
Graham Mill S Elevator Co. v. Thomas, 152 F. 2d 564 24
Greenfeld v. Commissioner, 165 F. 2d 318 9
Jergens v. Conner, 125 F. 2d 686 9
Jurs V. Commissioner, 147 F. 2d 805 10
Lurie v. Commissioner, 156 F. 2d 436 28
O'Dwyer v. Commissioner, 110 F. 2d 925 9
O'Langhlin v. Helvering, 81 F. 2d 269 9
Pfleghar Hardware Specialty Co. v. Blair, 30 F. 2d 614 22
Quock Ting v. United States, 140 U. S. 417 10
Richards v. Commissioner, 81 F. 2d 369 27
II
Cases — Continued Page
Sherman v. Commissioner, 76 F. 2d 810 10
Three States Lumber Co. v. Commissioner, 158 F. 2d 61 27
United States v. Adamson, 161 F. 2d 942 25
White (£• Wells Co. v. Commissioner, 19 B.T.A. 416, affirmed,
50 F. 2d 120 22
Williams v. McGowan, 152 F. 2d 570 24, 25
Woodall V. Commissioner, 105 F. 2d 474 10
Statutes :
Internal Revenue Code:
Sec. 22 (26 U.S.C. 1946 ed., See. 22) 30
Sec. 117 (26 U.S.C. 1946 ed., Sec. 117) 30, 31
Sec. 1141 9
Miscellaneous :
Federal Rules of Civil Procedure, Rule 52 9
Treasury Regulations 111 :
Sec. 29.22(a)-10 31
See. 29.117-1 32
In the United States Court of Appeals
for the Ninth Circuit
No. 11976
Geace Bros., Inc., petitioner
V.
Commissioner of Internal Revenue, respondent
ON PETITION FOB REVIEW OF THE DECISION OF THE TAX
COURT OF THE UNITED STATES
BRIEF FOR THE RESPONDENT
OPINION BELOW
The opinion of the Tax Court (R. 18-30) is reported
in 10 T.C. 158.
JURISDICTION
This petition to review the determination of the Tax
Court involves a deficiency in income and excess profits
taxes for the year 1943. A deficiency of $114,190.49 for
excess profits tax and $10,740.53 for declared- value ex-
cess profits tax, and an overassessment of $10,731.62 for
income tax was determined by the Commissioner of
Internal Revenue, who on September 20, 1945, notified
the taxpayer thereof, pursuant to Section 272 of the
Internal Revenue Code. (R. 10-12.) The taxpayer, on
December 10, 1945, pursuant to Section 272, Internal
Revenue Code, filed a petition with the Tax Court of the
(1)
United States to review the Commissioner's determina-
tion (R. 1), and thereafter on February 24, 1947, filed
an amended petition in which it alleged that it had over-
paid its excess profits taxes for the year 1943 by the
amount of $23,913.11 (R. 4-9). On March 19, 1947, the
Commissioner filed an answer to the amended petition
denying the taxpayer's claims. (R. 16-18.) On Janu-
ary 27, 1948, the Tax Court promulgated its findings of
fact and opinion (R. 18-30) and on April 5, 1948,
entered its decision determining a deficiency in the tax-
payer's excess profits taxes for the year 1943 in the
amount of $124,073.01 and an overpayment in declared-
value excess profits tax in the amount of $240.04 (R.
31).
The taxpayer on June 14, 1948, pursuant to Section
1141(a) of the Internal Revenue Code, as amended by
Section 36 of the Act of June 25, 1948, filed a petition
for review by this Court of the decision of the Tax
Court. (R. 32-38.)
QUESTIONS PRESENTED
1. Whether the Tax Court erred in holding that no
portion of the consideration received by the taxpayer
for the sale of its wine inventory represented payment
for the good will of the taxpayer's business.
2. Whether the Tax Court erred in holding that the
transaction under consideration was not the disposition
of a "unitary business" but rather the sale of particu-
lar assets which must be treated as ordinary income.
3. Whether the Tax Court erred in holding that the
taxpayer's stock in trade was not converted into a capi-
tal asset by virtue of its decision to discontinue business.
STATUTES AND REGULATIONS INVOLVED
These are found in the Appendix, infra.
STATEMENT
The facts as found by the Tax Court (R. 20-24) may
be summarized as follows :
The taxpayer, a California corporation with princi-
pal place of business at Santa Rosa, California, keeps
its books on an accrual basis of accounting and filed its
1943 income tax returns, prepared on that basis, with
the Collector of Internal Revenue for the first district
of California. In 1943 and for many years prior
thereto it has engaged in various enterprises, including
farming, grape growing and the manufacture and sale
of wines and beer. All of its stock was owned by its
president and manager, Joseph T. Grace, of Santa
Rosa, a man active in numerous civic, financial, indus-
trial and agricultural enterprises, and for over twenty
years a vice-president of the Bank of America. (R. 20.)
In 1921 the taxpayer purchased a wine-manufactur-
ing plant, long known to the trade as DeTurk Winery.
It operated the plant until 1943, producing from grapes
grown by it or bought from others sweet and dry types
of wine and some brandies which it sold to a regular
clientele partly in bottles bearing the label "DeTurk
Winery" and partly in barrels to wholesale customers
who bottled and sold it under their own labels. "The
DeTurk Winery, Established 1876" appeared above
taxpayer's name on its invoices. The product was ac-
cepted by the trade as a wine of high quality ; it was
successfully marketed, and the net profit from its sale
for the years 1936-1942 was as follows (R. 20-21) :
1936 $26,610.18 1939 $16,100.84
1937 33,184.93 1940 10,459.86
1938 20,377.92 1941 7,995.20
1942 18,959.53
In 1941 the taxpayer's sales were 157,518 gallons of dry
wine in bulk and 8,888 gallons in bottles at an average
price of 22.6 cents a gallon, and 46,943 gallons of sweet
wine in bulk and 12,443 gallons in bottles at an average
price of 37.2 cents a gallon. In 1942 it sold 114,046
gallons of dry wine in bulk and 7,028 gallons in bottles
at 22.2 cents a gallon, and 46,009 gallons of sweet wine
in bulk and 10,268 gallons in bottles at 36.8 cents a gal-
lon. During the years 1936-1942 its average investment
in this section of its business was $150,000, of which
roughly $60,000 was attributable to the plant and
$90,000 to inventory. As dry wine should be held two
years or more and red wine one year for aging, a sub-
stantial inventory was kept in stock. (R. 21.)
Finding his numerous activities excessive, G-race de-
cided late in 1942 to discontinue the wine business, and
the taxpayer limited its production for that year to
4,959 gallons extracted only from the grape supply
grown by it, whereas normally its annual production
was about 200,000 gallons. Nonetheless it had an in-
ventory of 522,761 gallons at the end of the year, pro-
duced in 1942 and prior years. (R. 21.)
In November 1942 Grace advised L. A. Weller, an old
acquaintance and vice-president of Garrett & Company,
Inc., of New York, that he intended to abandon the
wine business. Weller manifested interest, asking the
quantity of wine available for sale; saying that his
firm's lease on a California plant was about to expire,
and making inquiry about a lease of the DeTurk Winery
and the possibility of installing in it certain machinery.
(R. 21-22.) After Weller 's return to New York, Gar-
rett & Company requested Grace by telegram of De-
cember 28, 1942, to submit details if 'interested in
selling your inventory and leasing winery." Grace
replied the following day ''that we have several pur-
chasers for our inventory and lease of winery and dis-
tillery"; offered specified quantities of several types of
wine at 40, 55, 60 and 65 cents a gallon, respectively,
and a lease '^of winery, distillery and bonded ware-
house" for five years at an annual rental of $12,000.
In further negotiation by telegraph, Grace inquired
what part of the inventory was of interest, adding
(R. 22) :
* * * anxious to close deal immediately to get
part of sales in this year income tax returns * * *.
Agreement w^as reached by telephone and confirmed
by a telegram of Garrett & Company to Grace on De-
cember 31, 1942. By the contract Garrett & Company
agreed to purchase all of the taxpayer's wine at 50 cents
a gallon; to pay 20 per cent of the purchase price im-
mediately, and to lease the winery for five years at
$10,000 annual rent. On the same day the taxpayer
delivered 104,000 gallons; received $52,000 therefor
from Garrett & Company, and reported the profit on its
1942 income tax return, (R. 22.)
There remained 418,761 gallons of wine, carried on
the taxpayer's books at $79,046.33, consisting of 248,635
gallons of dry wine and 170,126 gallons of sweet wine.
During 1943 this entire stock was delivered and the tax-
payer received $124,317.50 for the dry wine and
$94,862.41 for the sweet wine. The price paid for the
latter was by agreement somewhat in excess of 50 cents
a gallon because 73,628 gallons contained a higher sugar
content than required by California standards. Gar-
rett & Company also agreed to purchase 600 wine bar-
rels at $4 each. On January 20, 1943, the parties signed
a detailed memorandum of the agreement, setting forth
its terms as above described, and on January 30 they
signed the contemplated contract of lease. By its terms
the taxpayer leased to Garrett & Company the premises
of the winery *' together with all winemaking machinery
and equipment located therein ' ' and the right to use the
spur track of a railroad on the east side of the property.
The annual rental was fixed at $10,000 ; the term of the
lease at five years with right of renewal for an addi-
tional five years. The lessee agreed to keep the equip-
ment in good working order and in a reasonable state
of repair ; it reserved the right to remove all machinery
and equipment installed by it within sixty days of the
lease's expiration. The lessor reserved a small office
and the use of well water on the leased premises for its
adjoining cold storage plant. It agreed to carry fire
insurance except on equipment installed by the lessee,
and in case of damage to make repairs with due dili-
gence. If the winery should be totally destroyed, the
lease was to terminate. (R. 23-24.)
In giving possession to Garrett & Company the tax-
payer surrendered its permit to manufacture and sell
so that the lessee could procure a permit to operate on
the jDremises; turned over to the lessee all its wine
stocks, cooperage and labels, its list of customers and
its regular staff of eight or ten experienced employees.
Thereafter neither the taxpayer nor Grace engaged in
making or selling wines. Garrett & Company paid rent
under the lease to the end of April, 1944, when the
parties terminated it by mutual agreement. On April
15, 1944, the taxpayer sold the winery to Taylor & Com-
pany for $150,000. Taylor & Company was not a sub-
sidiary of, or owned by Garrett & Company. (R. 24.)
In computing the taxpayer's income tax, declared
value excess profits tax and excess profits tax for 1943,
the Commissioner determined (1) that the taxpayer
realized ordinary income of $140,133.58 from the sale
of wine in 1943, and not a capital gain in that amount
as reported by it; and (2) that the taxpayer in 1943
realized a capital gain of $99,002.64 from the sale of
the winery. (R. 24.) Only the first of these determina-
tions was disputed in the Tax Court, the parties ha^dng
agreed that the gain arising from the sale of the winery
was taxable in 1944. (R. 30.) The Tax Court upheld
the Commissioner's determination as to the first issue
(R. 30) and from that decision the taxpayer petitioned
for review.
SUMMARY OF ARGUMENT
The taxpayer during the latter part of 1942 sold its
wine inventory and leased its winery plant to a compet-
ing wine manufacturer. The agreement was embodied
in a written memorandum and a lease. The Tax Court
held, despite the taxpayer's contention to the contrary,
that it was not intended that anything more be sold
other than as embodied in these documents. Accord-
ingly, the gain realized on the sale of the wine inventory
was to be reported as ordinary income and not long
term capital gain under Section 117, Internal Revenue
Code. No support is found in the record for the tax-
13ayer's argument that it was intended to convey its
good will, valued at $100,000, except the unsupported
testimony of the taxpayer 's sole stockholder. Moreover,
the record is replete with evidence which contradicts
that testimony and squarely supports the Tax Court's
conclusion regarding the character of the transaction.
The taxpayer's alternative contention that the trans-
action involved the sale of its business as a unit rather
than as a sale of separate assets was likewise found by
the Tax Court to be lacking in factual support and
analysis of the record discloses that this conclusion is
clearly correct.
The Tax Court similarly rejected the taxpayer's ar-
gument that a decision to terminate its business had the
effect of converting its stock in trade into a capital
asset, the sale of which yielded capital gain. No such
conversion could take place in view of the nature of the
asset, i.e., stock in trade, and in any event, the asset was
not held as a capital asset for more than six months so
as to yield capital gain.
ARGUMENT
The Tax Court correctly held that the taxpayer sold its wine
inventory and leased its winery and that the gain derived
therefrom was ordinary income and not long term capital
gain
During the latter part of 1942 the taxpayer, a corpo-
ration engaged in the manufacture and sale of wine,
negotiated with a representative of Garrett & Company,
a competing wine manufacturer, for the sale of its wine
inventory and the lease of its winery plant. These ne-
gotiations were concluded on December 31, 1942, follow-
ing a series of telegrams and telephone conversations.
The results of the parties' agreement were embodied
in a memorandum dated January 20, 1943, and a lease
dated January 30, 1943.
The Tax Court held that the written agreement dated
January 20, 1943, reflected the complete understanding
of the parties and despite the taxpayer's contention to
the contrary, nothing (such as good will) was sold or
intended to be sold except as therein stated. The Tax
Court likewise rejected as lacking factual support the
taxpayer's alternative contention that the transaction
involved the sale of its entire wine business as a unit
(and not separate assets) and should therefore be
treated as giving rise to capital gain. Lastly, the Tax
Court rejected the argument that the taxpayer's deci-
sion to give up its business converted its stock in trade
to a capital asset, the sale of which yielded capital gain.
All three contentions are now advanced on this appeal.
A. The Tax Court correctly held that no part of the
consideration received by the taxpayer was for the
sale of its good will
The taxpayer's chief contention is that at least
$100,000 of the $219,179.91 received by it from Garrett
& Company in 1943 under its contract for the sale of
9
wine represented consideration for the sale of its good
will. The Tax Court held (R. 27) that on the evidence
it was ' ' unable to make such a finding or to hold that the
sale contract covered any more than its terms indicate".
We submit this conclusion to be clearly correct and —
in the light of the record — phrased even more con-
servatively than necessary.
Whether the taxpayer contracted for the sale of its
good will presents a pure question of fact. Under fa-
miliar rules respecting the scope of judicial review, the
findings made by the Tax Court in this regard may not
be set aside unless "clearly erroneous". Section
1141(a), Internal Revenue Code, as amended by Sec-
tion 36 of the Act of June 25, 1948, Public Law 773, 80th
Cong., 2d Sess. ; Rule 52(a), Federal Rules of Civil
Procedure. It is the function of the Tax Court to
weigh the evidence, to judge the credibility of the wit-
nesses and to draw inferences from the facts. It was
not obliged as the taxpayer urges (Br. 20-22) to reach
its conclusion exclusively on the basis of the testimony
of the taxpayer's sole stockholder (Joseph T. Grace,
hereafter referred to as Grace) merely because it may
have been uncontradicted by other oral testimony.
Birnhaum v. Commissioner, 117 F. 2d 395 (CCA. 7th) ;
Cohen v. Commissioner, 148 F. 2d 336 (CCA. 2d) ;
Jergens v. Conner, 125 F. 2d 686 (CCA. 6th) ; Green-
feld V. Commissioner, 165 F. 2d 318 (CCA. 4th) ;
O'Laughlin v. Helvering, 81 F. 2d 269 (App. D. C) ;
O'Dwyer v. Commissioner, 110 F. 2d 925 (CCA. 5th).
Even conceding the existence of a rule which accords
weight to the uncontradicted though unsupported testi-
mony of an interested witness where the facts otherwise
permit the conclusion for which his testimony is offered
(Foran v. Commissioner, 165 F. 2d 705 (CCA. 5th))
that rule is strictly limited to cases in which the uncon-
tradicted testimony of unimpeached witnesses is con-
10
sistent with facts actually proved and has no applica-
tion to a case in which every other proven fact is
inconsistent with the so-called uncontradicted testi-
mony (Quock Ting v. United States, 140 U. S. 417, 420-
421, 422). And in the context of this case we submit
that the rule is completely inapplicable because every
proven fact tends to discredit and make wholly im-
probable the testimony so strongly relied upon/ The
Tax Court in its oiDinion recognized the numerous weak-
nesses of Grace's testimony, and analysis of the record
discloses numerous inconsistencies so basic as to justify
the conclusion that not only was the Tax Court's deci-
sion not "clearly erroneous" but that it was the only
correct one.
The form in which the parties here chose to mold the
transaction is plainly disclosed by the documents which
they executed. They are the best evidence of what they
intended to do and of what they accomi3lished. Apart
from the testimony of Grace, the facts prove a sale
barren of anything but the taxpayer's wine inventory
(and about 600 wine barrels). Not a word even imply-
ing the sale of something in addition thereto can be
found in the telegraphic communications which pre-
^ Since the oral testimony of Grace (R. 52-92) tends largely to
supply alleged omissions and to contradict the express terms of the
written contract of sale and lease entered into by the taxpayer and
Garrett & Company there would appear to have been a sufficient
basis for the complete rejection of such testimony by the Tax Court
under the familiar rule that all prior and contemporaneous oral
understandings are merged in a written contract which purports to
reflect the entire agreement of the parties. Gaylord v. Commis-
sioner, 153 F. 2d 408, 415 (CCA. 9th) ; Jurs v. Commissioner,
147 F. 2d 805, 810 (CCA. 9th) ; Sherman v. Commissioner, 76
F. 2d 810 (CCA. 9th). However, having permitted the tax-
payer's principal stockholder so to testify the Tax Court mani-
festly was under no obligation to give conclusive effect to such
testimony and to disregard the express terms of the written contract
embodying their agreement. Woodall v. Commissioner, 105 F. 2d
474 (CCA. 9th) ; Boland v. Commissioner, 118 F. 2d 622 (CCA.
9th) ; Jurs v. Commissioner, supra; Gaylord v. Commissioner, supra.
11
ceded the execution of the formal contract of sale ; or
in the memorandum contract itself ; or in the lease of
the winery ; or in letters subsequent to the sale between
the parties. Moreover, the contrary is strongly indi-
cated not only in all of the documentary evidence but
also in the inability of Grace to explain how the amount
of good will allegedly included was computed on the
separate items of the wine inventory ; in the absence of
evidence that the December 1942 market prices of the
various wines sold by the taxpayer were lower than the
prices quoted; in the attempt of Grace to exaggerate
the importance of the so-called "organization of key
men" transferred to the purchaser; in the cancellation
by Garrett & Company of the lease after approximately
one year of occupancy ; in the failure of the taxpayer to
show that the trade name allegedly contracted for was
ever in fact used by the purchaser ; and in the utter lack
of documentary evidence to corroborate any of the
claims of the taxpayer.
Each of the above-named items of evidence will be
separately analyzed in the following discussion.
The telegraphic communications. Grace testified (R.
53, 55-56) that prior to the interchange of telegrams be-
tween him and Garrett & Company he met Mr, L. A.
Weller, the executive vice president of the latter com-
pany, in Fresno and that at that time preliminary dis-
cussions were commenced by Weller 's statement that he
had heard that Grace had "some wine to sell" (R. 53).
Grace said that he told Weller that he wanted to get out
of the wine business and (R. 53-54) —
I wouldn't sell the wine inventory unless I sold
everything in connection with the wine business,
that is, winery and wine inventory and the good
will in it — everything that had to do with it * * *.
12
In addition, Grace estimated that the winery was worth
$125,000 and the wine inventory and good will, $250,000,
a total of $375,000. (R. 54.)
Grace, in addition, testified that Weller also said^
(R. 56)—
I can give you what you ask for your wine and
everything that goes with it, the good will, which
would be equivalent to $250,000. * * * if I give
you 50 cents a gallon, that will give you what you
are asking.
It is perhajDs fair to state that these two portions of
the testimony are the crux of the taxpayer's case that'
the parties contracted for the sale of good will.^ Yet
the contradiction of this testimony by the proven facts
is so marked as easily to justify any doubts the Tax
Court might have had as to Grace 's credibility or as to
the taxpayer's failure to support its case by evidence.
Thus, for example, despite Grace's alleged initial re-
fusal to sell any wine inventory unless everything con-
nected with the business, including the winery, was sold
the fact is that the winery was merely leased to Garrett
& Company. Grace's attempt to equate the leasing of
the winery to a sale (R. 55), on the theory thaj; the in-
vestment by Garrett in the winery would majale it un-
economical for Garrett not to purchase, topples when
the record discloses (R. 106-107) that in less than 15
months Garrett surrendered the lease and abandoned
" This alleged statement of Weller apparently is deemed crucial
by the taxpayer since in its "Summary of pertinent facts" (Br. 17) ,
it is presented and italicized as if it were a fact of record or at least
as if it were Weller's testimony rather than, as is the case, the
hearsay testimony — self-serving in the extreme — of Grace himself.
(Weller, it should be noted, had died prior to the date on which this
case was tried in the Tax Court. (R. 79.) )
^ These statements also provide the chief basis for the alternative
argument (Br. 39-42) that the transaction involved the sale of a
"unitary business".
13
the winery, and it was then sold by the taxpayer to a
third party.
Further, as was stressed by the Tax Court (R. 26-27),
it taxes the credulity that parties who have discussed
the sale of a wine inventory and intended thereby to
sell a going business inclusive of good will valued at
$100,000, for a total price of $250,000 (or in the alter-
native for a compromise price of 50 cents a gallon)
should never thereafter in their telegraphic communi-
cations or in their formal contract of sale have referred
to such good will, to the price of $100,000, or to any-
thing other than the wine itself. Rather, the taxpayer's
first formal telegraphed offer to sell (R. 71-72) care-
fully listed its entire wine inventory according to type
and price (40 cents and 65 cents per gallon). The sub-
ject matter of the telegram was otherwise limited to the
statement that the taxpayer had (R. 71) "several pur-
chasers for our inventory and lease of winery and dis-
tillery. Also bonded warehouse". There was not a
word about the sale of the so-called "business" of the
taxpayer. A second telegram sent that same day added
other types of wine to the inventory listed in the first
telegram (at 60 cents per gallon).
Garrett & Company responded with a suggestion that
it merely take a portion of the wine inventory — a sug-
gestion, of course, wholly inconsistent with the purchase
of the taxpayer's "business". Significantly, the tax-
payer responded by asking (R. 73) "What part of in-
ventory are you interested in. Stop. What are your
ideas on rental of plant". The next telegram dated
December 31, 1942, seems to provide a conclusive show-
ing of the parties' intention, for, in it, Garrett & Com-
pany confirmed the telephonic agreement into which the
parties had entered (R. 73-74) "relative to lease of
winery and purchase of bulk wines".
We submit that this interchange of telegrams wholly
14
belies Grace's testimony, and unquestionably justified
the Tax Court in concluding (R. 25) that it could not
find "an offer upon the evidence adduced" to sell not
merely the wine but also the good will of the business.
The memorandum dated January 20, 1943. Follow-
ing the extensive negotiations during the last few days
of December 1942 resulting in the telegraphic contract,
a lengthy memorandum dated January 20, 1943 (R.
111-116), was prepared by Grace or his attorney in
accordance with Grace's ideas and decisions (R. 81).
This was signed by Weller and Grace. The memoran-
dum, in summary, restated the understanding of the
parties, as evidenced by the telegrams, that the tax-
payer "has sold and said Garrett & Company, Inc., has
bought as of December 31, 1942, 104,000 gallons of wine
situate at DeTurk Winery, at Santa Rosa, California,
for the sum of $52,000.00 * * *" and the taxpayer
(R. Ill)—
agrees to sell and said Garrett & Company, Inc.,
agree/I [sic] to buy, all of the remainder of that cer-
tain inventory of wines now on hand at said De-
Turk Winery consisting of approximately 416,000
gallons, including both sweet and dry wines, at the
purchase price of fifty cents (50f^) per gallon.
Further provision was made for the payment of the
balance of the wine as shipped. It was also stated that
it was understood "that the inventory of wine sold ap-
proximates 520,000 gallons" (R. 112), and that 80,000
gallons of wine were to bear an increased price over and
above the purchase price of fifty cents per gallon. In
addition, provisions were made with respect to other
portions of the inventory not up to California stand-
ards of quality (R. 112-113), for the payment of taxes
assessed against a certain portion of the wine inventory
and for the payment of fire insurance premiums on the
wines by the buyer (R. 113) . Additional provision was
15
made for the sale of approximately 600 wine barrels on
hand at the winery at the price of $4 each. There then
followed elaborate provisions with respect to the lease
of the DeTurk Winery and the adjoining property.
It seems not unfair to suggest that if this agreement
— so painstakingly prepared and presumably with
legal assistance — was intended to embrace a transaction
whereby an entire business was to be transferred to
the purchaser it fell far short of its purpose. The agree-
ment discloses a most meticulous concern with the wine
inventory and with nothing more.
Presumably if there were to be a transfer to the pur-
chaser of the seller's stock of bottles (R. 58), its list of
customers (R. 61), its highly trained ''organization".
(R. 61) and its "cooperage" (R. 24), some mention of
these items would have been made. Presumably, too,
there would have been some reference to the obligations
incurred by the taxpayer and its stockholders in con-
nection with such a sale. One might reasonably have
expected to find a provision under which the taxpayer
and its stockholders agreed not to compete with the
purchaser in the wine business, or to use the trade name
and label, or the list of customers assigned, or to
''pirate" the "key men" of the organization. Nor
would it be unusual to find some reference to the dis-
position of the taxpayer's accounts receivable and pay-
able. But on a record barren of a single reference to
ought save the wine inventory, the conclusion is a nec-
essary one that the mere testimony of Grace must fall
under the weight of the documentary evidence pre-
sented.
The lease dated January 30, 1943 (R. 116-120). Here
again, we have documentary evidence supporting the
Tax Court's conclusion. The lease gave possession to
Garrett of the premises on which the DeTurk Winery
was located as well as (R. 117) "all- wine making ma-
16
chinery and equipment located therein and the right
and privilege to use the spur track" of a railroad run-
ning alongside of the plant. A transfer of an "entire
business" to a purchaser would appear to be incom-
patible with the mere lease of all the wine making
machinery. This inconsistency takes on added signifi-
cance when viewed against the fact, suggested by the
record, that the location and size of the manufacturing
plant are of some importance in the wine making in-
dustry. (R. 55-56.)
The L. A. Weller Letters (131-138). The taxpayer,
as shown, was unable to offer a scintilla of written evi-
dence to buttress its case. Moreover, in each of the
letters written by L. A. Weller regarding the transac-
tion there is a corresponding failure to mention any-
thing other than the sale of the wine inventory.
Further, in the letter dated November 5, 1946 (E. 135-
138), there is a clear-cut contradiction of Grace's testi-
mony regarding one aspect of the transaction which
bears materially upon the whole. Grace, it will be
remembered, testified (R. 53-54) that in the personal
conversations between the two prior to the interchange
of telegrams he had informed Weller that the wine in-
ventory would not be sold unless everything in con-
nection with the business, including the winery and
the good will, were also sold ; and that the winery was
worth $125,000, the wine inventory and good will,
$250,000, a total of $375,000 for everything. Weller 's
letter stated (R. 135) ''I find nothing in the exchange
of our telegrams about his wanting to sell us the plant
or do I have any recollection of it * * *." Certainly
the failure to recall the reference to the sale of the
winery at the jirice of $125,000 in the very same conver-
sation in which the sale of the good will was allegedly
discussed casts a strong shadow of doubt upon Grace's
testimony regarding that conversation. Beyond ques-
17
tion, it presents a material contradiction upon which
a trial court may base its conclusion to disregard other
portions of the challenged testimony.
Further analysis of the Weller letter shows no men-
tion of any sale of the "business" or good will. On the
contrary, the sale is specifically referred to as a "deal
* * * for the Santa Rosa wine and plant lease. " (R.
135.) Thus, the only other person whose description of
the sale could conceivably have accorded mth that of
the taxpayer's failed in any respect so to do.
The inclusion of good tvill in the telegraphed offer.
Grace apparently recognized the rather strong con-
flict between his testimony that a total price of $250,-
000 had been fixed by him for the entire wine inven-
tory, inclusive of good will, and the fact that in the
offer made subsequently thereto to Garrett hj tele-
gram dated December 28, 1942 (R. 71-72) the sepa-
rate types and grades of wine were listed with prices
of 40 cents, 65 cents and 60 cents. At these prices
the inventory would have sold for $280,000. In addi-
tion, Grace had testified that the parties had generally
agreed on a price of 50 cents per gallon although the
prices as offered averaged about 57 cents per gallon.''
Grace attempted to explain away these inconsistencies
on the ground that the prices were roughly comxnited
to include the good will sought to be sold. (R. 83.)
Yet on cross-examination (R. 88-89) he admitted that
the listing of prices was not done on the basis of in-
cluding good will with reference to each type of wine.
Again, a self-contradiction greatly weakening the
probative force of his testimony.
^ The trial court's recognition of this conflict in Grace's own testi-
mony is indicated by its cogent questions (R. 83) with reference to
the fluctuation of prices on different types of wine as compared with
a flat price on all wines and the difference between the figure of 50
cents per gallon and the average of the prices listed in the offer of
December 28.
18
Market prices of ivines in December 1942. The tax-
payer's effort to contradict the express terms of the
agreement depends, as just shown, in large measure
upon a showing that the price or prices quoted for
the wine inventory included a substantial pro^dsion
for good will. Corroborative evidence thereof might
possibly have been found in the fact — if it was a fact
— that the market prices for the taxpayer's grades of
wine in December 1942 were substantially lower than
the jDrices quoted to Garrett. For this reason it seems
clear that the Tax Court was quite justified in con-
cluding (R. 27) that it was significant that the tax-
payer —
offered no evidence of the market price of its
grades of wine in December 1942 apart from
Grace's general testimony that the price paid by
Garrett & Co. was excessive by $100,000.
The taxpayer, however, urges (Br. 36-37) that this
omission is supplied by that portion of the stipulation
of facts (R. 103-108) which showed the average prices
at which the taxpayer had been selling its wine in the
year 1942; that applying such average ijrice to the
number of gallons sold there would have been received
about $100,000 less than the amount actually received.
This the taxpayer now offers in lieu of the vitally
essential evidence not elsewhere to be found in the
record. The short answer to this is that an average
price at which wine is sold during the year gives no
possible basis on which to determine what the price
of such wine is at any one point of the year. Obviously,
the price in December may so far exceed the price
during the early part of the year ^ as to completely
destroy the probative value of such evidence to support
^ Some indication that such, in fact, was the situation in 1942 may-
be found in Grace's testimony that conditions [in June 1942] "were
getting better". (R. 60.)
19
the conclusion desired by the taxpayer. Yet the
taxpayer further argues (Br. 36-37) that the Com-
missioner ''was necessarily fully informed of the
price at which wine was sold in December, 1942" and
that "there can be no doubt that" he "would have in-
troduced such fact in evidence". But we think it
almost too plain to require statement that the burden
of j^resenting evidence in this case lay with the tax-
payer and not with the Commissioner. That burden
— which it so obviously failed to carry — may not now
be supplied by mere argument.
The organization of ''hey men". In addition to the
direct contradiction within Grace's testimony there
is also to be found a rather flagrant exaggeration
obviously offered for self-serving motives. For in-
stance, Grace sought to create the impression that the
employees of Grace &4jOTHpai!iy w ere an organization
of "key men" with valuable and extensive training
in the "art of wine making" (R. 57) which enhanced
the value of the business (R. 52-53, 90) and if trans-
ferred to the purchaser was to be included in any
consideration of the value of the taxpayer's good will.*^
On cross-examination he disclosed for the first time
that this valuable organization consisted of "three or
four key men". (R. 77.) The "organization" in-
cluded "about eight, maybe ten" men to do the ordinary
work. (R. 77.) It is rather informative in this con-
nection to refer to Exhibit 4-D. (R. 121.) There a
breakdown of the taxjiayer's winery operations for
1942 discloses that the only labor or salary costs in-
curred were $6,134.32 for all operating labor, $1,173.70
for all bottling labor and $3,398.80 for all salaries and
^ Since the decision to remain with Garrett & Company rested with
the employees themselves (c/. Grace's testimony, R. 57) it would
appear questionable whether the taxpayer had the power or right to
"transfer" to Garrett its "organization"' by any means which would
entitle it to include that organization in its good will evaluation.
20
commissions paid as selling expenses. Thus this
''valuable organization" of key men (some 3 or 4,
or 8 or 10) must necessarily have received but a small
portion of the entire $10,700 paid throughout 1942
for all types of labor, salary and commissions. Testi-
mony of this character, indicating a deliberate effort
to color the facts, suggests the substantial infirmity
of the taxpayer's evidence.
The DeTurk trade name. As a measure of the value
of the taxpayer's good will, testimony was offered to
the effect that the wines produced by the DeTurk
Winery were above average (R. 43) and that the
DeTurk Winery, which sold its product under the
DeTurk Winery label, had a good reputation in the
wine industry which could properly be valued at five
times its annual income (R. 44). No mention of the
use of such label or trade name was, however, made
in the telegrams or the memorandum agreement
previously referred to. No restriction on the con-
tinued use of the name by Grace was embodied
therein. Since the taxpayer continued to grow grapes
(R. 64) the opportunity for its return to the wine-
making business was ever present. Moreover, Grace
was unable to state whether or not Garrett & Com-
pany in fact ever used the DeTurk wine label (R.
92). Finally, within 15 months the right to the use
of that label or trade name was again apparently
abandoned by Garrett when it yielded up its rights
to the winery to Grace. All of this evidences a
startling lack of interest by both parties in this trade
name which had a value according to the taxpayer of
a substantial portion of the $100,000 allegedly paid
in excess of the value of the inventory.
The absence of documentary evidence. From the
foregoing it appears that the taxpayer's entire case
must be sustained upon the testimony of Grace alone
21
for nowhere is there the slightest written evidence to
aid the taxpayer. Yet not only were Grace and Wel-
ler involved in this transaction but there was testi-
mony (R. 52-53) regarding conversations with other
persons about the sale of the taxpayer's business as
a unit and (R. 69-70) concerning discussions between
Grace and his wife, both members of the board of
directors, about the decision to dispose of the winery.
But the testimony of none of the persons with whom
such conversations were allegedly held was offered
by the taxpayer. And, more significantly, it would
seem that where at least four or five individuals deal
in a transaction involving a quarter of a million dol-
lars some writing would be made at some point in
the negotiations in which mention would be made of
so vital a factor as the disposition of good will, the
right to engage in the business and the use of the
trade name. But, as previously stated, not a word
appears any place concerning restrictions upon the
taxpayer's continued dealings in the wine business in
competition with Garrett, its use of the DeTurk
Winery label or continued solicitation of the list of
customers transferred to Garrett."^
For all of these reasons therefore we submit that
the factual case attempted to be made by the tax-
payer falls before the weight of the record.
Before the Tax Court, as here (Br. 22-35), the tax-
payer sought the aid of a legal presumption to
demonstrate that it had sold its good will. The pre-
sumption relied on is to the effect that a profitable
business is deemed to have a good will value and when
^ Assuming, arguendo, that all the valuable tangibles and in-
tangibles which go to make up the good will of a going business
were contracted for by the parties, there would remain a serious
doubt as to the value to the purchaser of such good will transferred
without the slightest restraint on its immediate impairment by a
seller who might reengage in the same business the very next day.
22
sold in its entirety a part of the consideration paid is
attributable to such good will whether or not the con-
tract of sale so specifies. White dc Wells Co. v. Com-
missioner, 19 B.T.A. 416, afarmed, 50 F. 2d 120 (CCA.
2d) ; Pfleghar Hardtvare Specialty Co. v. Blair, 30
P. 2d 614 (CCA. 2d).
The Tax Court properly held (R. 26-27) that the
presumption referred to could not apply to the facts
of this case since the taxpayer had failed to prove that
the entire business including good will of a value of
$100,000 had, in fact, been sold.
It is self-evident that if the transfer of an entire
business carries with it a factor of good will, one must
show that an entire business has been transferred in
order to sustain the contention that the good will has
been conveyed. And we think it would unduly burden
this discussion to refer again to the numerous factual
portions of the record which demonstrate beyond
debate that the transaction merely involved the sale
of the taxpayer's wine inventories and the lease of
its plant and equipment.
Moreover, the record further shows (R, 61-62) that
in April 1944 when the taxpayer sold the winery and
its equipment to Taylor and Company for a price of
$150,000, its cost basis was about $51,000 so that it
realized a gain of $99,000. If we compare the gain
so realized with Grace's estimate of $100,000 for the
entire good will of the business — or as he said (R.
62) "for the whole thing" — it becomes apparent that
if any consideration was received by the taxpayer for
its good will it was received in 1944, on the sale of its
plant and equipment to Taylor and Company.
23
B. Tlie Tax Cpurt correctly held that the sale of the
taxpayer's wine inventory and the lease of its
winery was not the disposition of a ^^ unitary busi-
ness"
The taxpayer urges (Br. 39-42) that since the De-
Turk Winery business was one of several different
business oj^erations in which it was engaged its dis-
position as a going concern was the sale of an entire
business which should be taxed as a sale of a capital
asset. The taxpayer recognizes (Br. 41) that its
argument on this phase of the case rests on the same
fact basis as the first contention. And the Tax Court
dismissed this alternative argument since it could not
accept the "factual premise" (R. 27) uiDon which it
was based. The transaction, it held (R. 28), "was
not single, but comprised a sale of wine and barrels
and the lease of a winery". Reference was made to
the fact that if the entire transaction had been a unit
the profit therefrom would have been includible in
the taxpayer's 1942 return and not its 1943 return
since the contract of sale was entered into in 1942.
Moreover, the profit so reportable would include the
undisclosed j^rofit from that portion of the wine de-
livered in 1942 and from the sale of barrels and from
rent under the five-year lease as well as the gain on
the wines delivered in 1943. Furthermore, the fact
that the taxpayer reported the gain on the 104,000
gallons of wine billed to Garrett as ordinary income
in 1942 ^ is evidence which indicates a contrary
understanding of the nature of the transaction than
^In order to get "part of sales" (R. 73) in its 1942 return "for
income tax purposes" (as Grace explicitly stated in his telegram of
January 1, 1943— R. 74-75) a portion of the inventory (104,000
gallons having a value of $52,000) was billed to Garrett on Decem-
ber 31, 1942, immediately upon consummation of the agreement to
sell.
24
that alleged. Althoiigli it is true that the position
taken in a tax return does not ordinarily preclude a
reversal by the taxpayer, the situation is otherwise,^
as here, the manner in which the transaction was re-
ported offers strong evidence of the understanding
and intention of the party to, and the nature of, the
transaction.
In making this argument, the taxpayer relies upon
Graham Mill d; Elevator Co. v. Tliomas, 152 F. 2d 564
(CCA. 5th), to support its view that a sale of all of
the assets of a business is not made in the course of
business and therefore constitutes a sale of capital
asset. Not only does this case fail to aid the taxpayer's
position, but it greatly weakens it. There the court
was concerned with the sale of notes and accounts
receivable and held that the selling of such assets pre-
vented the resulting loss realized from being treated
as an ordinary business loss.^ The evidence, the court
said (p. 565), showed that the taxpayer —
was not in the business of selling notes and ac-
counts, and had never so dealt with its notes and
accounts before. * * * They represented the tax-
payer's business capital, but were not a part of
his stock in trade.
Thus, as the Tax Court pointed out (R. 29-30), the
rationale of the decision indicates that if (as in the
present case) the taxpayer's normal stock in trade
had been the subject of consideration the decision
would have been the reverse of what it was — since
stock in trade is expressl}^ excluded from the defini-
tion of Section 117(a), Internal Revenue Code, Ajd-
pendix, infra.
^ Since in the Graham Mill case the "goods on hand" — i.e. the
stock in trade was taken by the purchaser in each instance at in-
ventory price (p. 565) no gain or loss was realized on the inventory
and the issue present in this and Williams v. McGowan, 152 F. 2d
570 (CCA. 2d), could not arise.
25
Moreover, the case of Williams v. McGoivan, 152 F.
2d 570 (CCA. 2d), directly repudiates the taxpayer's
contention. There the taxpayer sold his business "as
a whole" for a price of about $64,000. The ''business"
sold included cash of $8,100, accounts receivable of
$7,000, fixtures of $8,000, a merchandise inventory of
about $49,000, and $1,000 of accounts payable. Having
suifered a net loss upon the transaction, the taxpayer
attemi^ted to report it as ordinary loss rather than a
capital loss. The question raised was (p. 572)
"whether upon the sale of a going business it is to be
comminuted into its fragments, and these are to
be separately matched against the definition in
§ 117(a)(1), or whether the whole business is to be
treated as if it were a single piece of property". The
court held in a concise but learned analysis that the
definition of capital assets under Section 117(a)(1)
of the Internal Revenue Code rejects the fiction of
firm assets as an indivisible interest and accordingly
that as to each of the items transferred (cash, re-
ceivables, fixtures and merchandise inventory) there
must be separate consideration to determine whether
it falls within the definition of Section 117. The con-
clusion naturally followed that the fixtures and the
inventory were not capital assets since the former
was subject to depreciation and the latter was "stock
in trade" expressly excluded from Section 117.
Thus, assuming the factual validity of the tax-
payer's argument that what was sold was a "unitary
business", the Williams case demonstrates the ir-
relevancy of that fact to the question of whether the
assets which go to make up the business may be treated
as giving rise to capital gain rather than ordinary
income.
The taxpayer's reference (Br. 40) to United States
V. Adamson, 161 F. 2d 942 (CCA. 9th), obviously is
26
wide of the mark for that case held only that the dis-
position of certain rights in two contracts and against
a judgment debtor constituted the sale of capital as-
sets. It had no possible bearing on the sale of stock
in trade in a going business.
Thus, since there is no factual basis for the view
that a single capital item was sold and, for the further
reason that the legal rule established by Williams v.
McGoivcm precludes such a result, the Tax Court's
conclusion that the profit from the sale under con-
sideration was ordinary income is clearly correct.
C. The Tax Court correctly held that the taxpayer's
wine inventory did not lose its character as stock in
trade or as property held primarily for sale to cus-
tomers in the ordinary course of trade or business hy
virtue of the taxpayer's decision to discontinue its
wine business
The taxpayer's final contention (Br. 42-46) is that
its wine inventory was converted into a capital asset'
when the decision was made to dispose of its winery
business, and that the gain realized upon the sale of
such a capital asset constitutes long term capital gain.
The Tax Court held (R. 28-30) that a decision to
liquidate one's business does not change the character
of its stock in trade. The essential factor is, of course,
the character of the property sold. Stock in trade
may under the proper circumstances be converted
into a capital asset. But the change will take place
not merely by the decision of the taxpayer to sell all
his inventory (a result generally hoped for by all
inventory sellers) but by the modification of the use
or purpose to which the property is placed. Thus, one
who sells carpentry tools may convert them into
capital assets by using them as tools rather than as
stock in trade to be sold to customers.
27
In any event on this issue the holding of Williams
V. McGowan, supra, is again decisive. There, as here,
a decision to dispose of a going business was without
effect on the character of the gain or loss on the
separate assets to be sold.
In essence, this has been the view taken by this
Court. Thus, in Commissioner v. Boeing, 106 F. 2d
305 (CCA. 9th), certiorari denied, 308 U. S. 619,
it was held immaterial that a taxpayer engaged in
the sale of cut logs from lands owned by him was
motivated by a desire to liquidate his investment. The
gain resulting from such sales — being from his "trade
or business" — was ruled ordinary income. In the
instant case, the wine sold was admittedly the stock
in trade of the taxpayer. Since that factor was the
basic question at issue in the Boeing case, it would'
appear that the same result should follow a fortiori
in the present case. See also Richards v. Commis-
sioner, 81 F. 2d 369, 373 (CCA. 9th), in which the
motive to liquidate was likewise deemed without con-
sequence on the sale of assets sold in the course of
business.
The cases on which the taxjoayer relies {Three
States Lumber Co. v. Commissioner, 158 F. 2d 61
(CCA. 7th) ; Adamson v. Commissioner, decided De-
cember 11, 1946 (1946 P-H T. C Memorandum De-
cisions, II 46,286)) fail, on analysis, to lend any weight
to this argument. The Three States case involved the
sale of timber land whose value as a lumber producing
asset had been exhausted. The sale was held (p. 64)
to be an "orderly liquidation" of "capital assets
[which had alivays been capital assets in the hands of
the tax2)ayer] which no longer furnished income".
The case is clearly no authority for the view that
stock in trade is converted into a capital asset merely
because of the taxpayer's decision to liquidate his
28
entire inventory. The Adamson case, already dis-
cussed supra, held only that the assignment of certain
judgment rights against a debtor for, and certain
reversionary rights in, a patent and trademark con-
stituted a sale of capital assets since the taxpayer was
not in the business of selling patents and trademarks.
There was no issue as to the conversion of a non-
capital asset to a capital asset.
By way of anticipating a further objection to its
final contention, the taxpayer has also cited Lurie v.
Commissioner, 156 F. 2d 436 (CCA. 9th), and Com-
missioner V. Gracey, 159 F. 2d 324 (CCA. 5th). These
cases are submitted to fill the factual gap — not met
by the argiunent that a conversion was effected — that
in any event the so-called "capital assets" were not
'held for the statutory period of six months necessary
to give rise to long term capital gain. (Section
117(a)(4), Internal Revenue Code, Ai3pendix, infra.)
Neither case is in i3oint.
Lurie v. Commissioner, supra, involved the question
whether amounts paid on the retirement of coupon
notes should be considered as amounts received "in
exchange therefor", under Section 117(f), Internal
Revenue Code, since only by virtue of that special
provision is the retirement of a security regarded as
the "exchange" of a capital asset. It needs no more
to show that the case is irrelevant on the question
whether stock in trade if subject to being "converted"
must be held for more than six months thereafter in
order to obtain the benefit of capital gains treatment.
The Gracey case, supra, likewise involved a section.
Section 117(h)(1), Internal Revenue Code, which
has no application to stock in trade, but which merely
governs exchanges of one asset for another, in which
event the holding period for the property transferred
may be added to the period during which the property
29
received is thereafter held. But again, the reason lies
in the express exception of Section 117(h)(1) to the
general rule — an exception not accorded a taxpayer's
inventory or stock in trade.
It is submitted, therefore, that stock in trade can-
not be converted to a capital asset merely by a desire
to liquidate; in any event, that such a "converted
asset" must be held for more than six months to give
rise to capital gain.
CONCLUSION
The decision of the Tax Court is correct and should
be affirmed.
Respectfully submitted,
Theron Lamar Caudle,
Assistant Attorney General.
Ellis N. Slack,
S. Walter Shine,
Special Assistants to the Attorney
General,
December, 1948.
30
APPENDIX
Internal Revenue Code:
Sec. 22 [as amended by the Public Salary Tax
Act of 1939, c. 59, 53 Stat. 574, Sec. 1]. Oross
Income.
(a) General Definition. — "Gross income" in-
cludes gains, profits, and income derived from
salaries, wages, or compensation for personal serv-
ice (including jDersonal service as an officer or
employee of a State, or any political subdivision
thereof, or any agency or instrumentality of any
one or more of the foregoing), of whatever kind
and in whatever form paid, or from professions,
vocations, trades, businesses, commerce, or sales,
or dealings in property, whether real or personal,
growing out of the ownership or use of or interest
in such property; also from interest, rent, divi-
dends, securities, or the transaction of any business
carried on for gain or profit, or gains or profits
and income derived from any source whatever.
* * *
(26U.S.C. 1946ed., Sec. 22.)
Sec. 117 [as amended by the Revenue Act of 1941,
c. 412, 55 Stat. 687, Sec. 115, and the Revenue Act
of 1942, c. 619, 56 Stat. 798, Sec. 150 and Sec. 151].
Capital Gains and Losses.
(a) Definitions. — As used in this chapter —
(1) Capital Assets. — The term "capital as-
sets" means property held by the taxpayer
(whether or not connected with his trade or busi-
ness), but does not include stock in trade of the
taxpayer or other property of a kind which
would properly be included in the inventory of
the taxpayer if on hand at the close of the tax-
able year, or property held by the taxpayer pri-
marily for sale to customers in the ordinary
course of his trade or business, or property, used
in the trade or business, of a character which is
subject to the allowance for depreciation pro-
vided in section 23(1), or an obligation of the
31
United States or any of its possessions, or of a
State or Territor}^, or any political subdivision
thereof, or of the District of Columbia, issued
on or after March 1, 1941, on a discount basis
and payable without interest at a fixed maturity
date not exceeding- one year from the date of
issue, or real property used in the trade or busi-
ness of the taxj^ayer ;
(2) Short-Term Capital Gain. — The term
"short-term capital gain" means gain from the
sale or exchange of a capital asset held for not
more than 6 months, if and to the extent such
gain is taken into account in computing net in-
come;
*****
(4) Long-Term Capital Gain. — The term
"long-term capital gain" means gain from the
sale or exchange of a capital asset held for more
than 6 months, if and to the extent such gain is
taken into account in computing net income ;
*****
(6) Net Short-Term Capital Gain. — The term
"net short-term capital gain" means the excess
of short-term capital gains for the taxable year
over the short-term capital losses for such year ;
*****
(10) Net Capital Gain. —
(A) Corporations. — In the case of a corpora-
tion, the term "net capital gain" means the ex-
cess of the gains from sales or exchanges of
capital assets over the losses from such sales or
exchanges ;
*****
(26 U.S.C. 1946 ed., Sec. 117.)
Treasury Regulations 111, promulgated under tlie
Internal Revenue Code:
Sec. 29.22(a)-10. Sale of Good TF^7/.— Gain or loss
from a sale of good will results only when the business,
32
or a part of it, to which the good will attaches is sold,
in w^hicli case the gain or loss will be determined by com-
paring the sale price with the cost or other basis of the
assets, including good will. (See sections 29.111-1,
29.113(a) (14)-1, and 29.113(b) (1)-1 to 29.113(b) (3)-2,
inclusive. ) If specific payment was not made for good
will, there can be no deductible loss with respect thereto,
but gain may be realized from the sale of good will built
up through expenditures which have been currently de-
ducted. It is immaterial that good will may never have
been carried on the books as an asset, but the burden
of proof is on the taxpayer to establish the cost or other
basis of the good will sold.
*****
Sec. 29.117-1 Meaning of Terms. — The term "capital
assets" includes all classes of property not specifically
excluded by section 117(a)(1). In determining
whether property is a "capital asset," the period for
which held is immaterial.
The exclusion from the term "capital assets" of
property used in the trade or business of a taxpayer of
a character which is subject to the allowance for depre-
ciation provided in section 23(1) and of real property
used in the trade or business of a taxpayer is limited to
such property used by the taxpayer in the trade or busi-
ness at the time of the sale, exchange, or involuntary
conversion. Gains and losses from the sale or exchange
of such property are not subject to the percentage pro-
visions of section 117(b) and losses from such trans-
actions are not subject to the limitations on losses
provided in section 117(d), except that under section
117(j) the gains and losses from the sale or exchange
of such property held for more than six months may be
treated as gains and losses from the sale or exchange of
capital assets, and may thus be subject to such limita-
tions. See section 29.117-7. Property held for the pro-
duction of income, but not used in a trade or business of
the taxpayer, is not excluded from the term "capital
assets" even though depreciation may have been allowed
with respect to such property under section 23(1)
prior to its amendment by the Revenue Act of 1942.
However, gain or loss upon the sale or exchange of land
33
held by a taxpayer primarily for sale to customers in
the ordinary course of his business, as in the case of a
dealer in real estate, is not svibject to the limitations of
section 117(b), (c), and (d). The term ''ordinary
net income" as used in these regulations for the pur-
poses of section 117 means net income exclusive of gains
and losses from the sale or exchange of capital assets,
■s * * * *
Example (2). * * *
Section 117(a) (2) to (9), inclusive, defines ''short-
term capital gain," "short-term capital loss," "long-
term capital gain," "long-term capital loss," "net
short-term capital gain," "net short-term capital loss,"
"net long-term capital gain," and "net long-term capi-
tal loss." These terms are used in the subsequent sub-
sections of section 117.
The phrase "short-term" applies to the category of
gains and losses arising from the sale or exchange of
capital assets held for six months or less; the phrase
"long-term" to the category of gains and losses arising
from the sale or exchange of capital assets held for
more than six months. The fact that some part of a
loss from the sale or exchange of a capital asset may be
finally disallowed because of the operation of section
117 (cl) does not mean that such loss is not "taken into
account in computing net income" within the meaning
of that phrase as used in section 117(a) (3) and (5).
In the definition of "net short-term capital gain," as
provided in section 117(a)(6), the amounts brought
forward to the taxable year under section 117(e) are
short-term capital losses for such taxable year.
Gains and losses from the sale or exchange of capital
assets held for not more than six months (described as
short-term capital gains and short-term capital losses)
shall be segregated from gains and losses arising from
the sale or exchange of such assets held for more than
six months (described as long-term capital gains and
long-term capital losses). The percentage brackets of
section 117(b) have no application to corporations, cor-
porate gains and losses being taken into account to the
full extent, without regard to the length of time the
34
capital assets are held (though because of the limitation
in section 117(d) such losses may not be deductible in
full).
Section 117(a) (10) defines ''net capital gain." In
the case of a corporation the term "net capital gain"
means the excess of the gains from sales or exchanges
of capital assets over the losses from such sales or
exchanges, which losses include any amounts brought
forward pursuant to section 117(e).
•il U. S. GOVERNMENT PRINTING OFFICE: 1948 8IS3I6
No. 11,976
IN THE
United States Court of Appeals
For the Ninth Circuit
Grace Bros., Inc.,
Petitioner,
vs.
Commissioner of Internal Revenue,
Respondent.
PETITIONER'S REPLY BRIEF.
George H. Koster,
Bayley Kohlmeier,
300 Montgomery Street, San Francisco 4, California,
Attorneys for Petitioner.
DEC 15 1948
PAUL P, O'BRIEN,
Subject Index
Page
I. At least $100,000 of the consideration received by-
petitioner for the assets of its winery business was
received for the good will of the business and con-
stituted capital gains 1
A. Introductory statement 1
B. The form of the transaction is not conclusive
and should not prevail over the substance and
effect 2
C. The testimony of Mr. Grace is entitled to full
consideration and weight and the Tax Court erred
in disregarding his testimony 4
D. In substance and effect the transaction was a sale
of petitioner's entire winery business including
its good will 7
II. Other issues 11
III. Conclusion 11
Table of Authorities Cited
Pages
Betts V. United States, 62 Ct. Cls. 1 3
Didlake v. Roden Grocery So., 160 Ala. 484, 49 So. 384. .. . 3
Helvering v. Tex-Penn Oil Co. (1937), 300 U. S. 481, 81
L. Ed. 755, 57 S. Ct. 569 3
Ida P. Huggins, 1 T. C. 1214, Pren. Hall. T. C. Memo.
Vol. 12, Par. 43172 9
Pfieghar Hardware Specialty Co. v. Blair, 2 Cir. (1929),
30 F. (2d) 614 3, 9
Watson V. Commissioner, 9 Cir. (1932), 62 F. (2d) 35. . . . 3
Weiss V. Stearn (1924), 265 U. S. 242, 68 L. Ed. 1001,
44 S. Ct. 490 3
White & Wells, v. Commissioner, 19 BTA 416 affm'd, 2 Cir.
50 F. (2d) 120 3, 9
No. 11,976
IN THE
United States Court of Appeals
For the Ninth Circuit
GrRACE Bros., Inc.,
Petitioner,
vs.
Commissioner of Internal Revenue,
Respondent.
PETITIONER'S REPLY BRIEF.
I.
AT LEAST $100,000 OF THE CONSIDERATION RECEIVED BY
PETITIONER FOR THE ASSETS OF ITS WINERY BUSINESS
WAS RECEIVED FOR THE GOOD WILL OF THE BUSINESS
AND CONSTITUTED CAPITAL GAIN.
A. Introductory statement.
Respondent's argument with regard to petitioner's
contention that the transaction between petitioner and
Garrett & Company, involved a transfer of the good
will of petitioner's winery business is devoted prima-
rily to a detailed discussion of the stipulated facts and
evidence and his basic contentions appear to be (1)
that in form the transaction was a sale of the wine in-
ventory and a lease of the winery and equipment
which did not involve petitioner's good will, and (2)
that the testimony of Mr. Grace is inconsistent with
the form of the transaction and should be disregarded.
Respondent completely disregards the substance and
effect of the transaction and dismisses with brief com-
ment the decisions which support petitioner's con-
tention. Since petitioner has never denied that the
transaction was in the form of a sale of wine, no at-
tempt will be made in this brief to discuss the details
stressed by respondent with regard to that point, and
the argument will be confined to the basic issues and
contentions.
B. The form of the transaction is not conclusive and should not
prevail over the substance and effect.
In support of his contention that no part of the
consideration received by petitioner was received by
it for its good will, respondent emphasizes and relies
primarily upon the fact that in the negotiations be-
tween the parties the written communications and
agreements referred primarily to the wine inventory
and made no mention of petitioner's good will. Peti-
tioner has conceded from the outset that, in form, the
transaction between it and Garrett & Company, was a
sale of the wine inventory and a lease of the winery
and equipment. Likewise petitioner has never con-
tended that Garrett & Company sought to purchase or
acquire the good will of petitioner's winery business.
Petitioner's contention has been and now is that
despite the form of the transaction, it did involve, in
substance and effect, a transfer of petitioner's entire
winery business including petitioner's good mil. Peti-
tioner has not challenged the facts as found by the
Tax Court but has based its appeal on the ground
that the Tax Court erroneously interpreted the true
nature of the transaction and based its decision en-
tirely upon the form as set forth in the various writ-
ten documents. Further discussion of the form of the
transaction would be of no assistance in the determi-
nation of the real issue presented.
One of the basic principles of tax law is that taxa-
tion is a practical matter and that the determination
of tax controversies should be based upon the sub-
stance and effect rather than the form of the transac-
tion. This principle was established by early decisions
of the Supreme Court of the United States and has
been repeatedly annoimced by almost every Court.
Weiss V. Steam (1924), 265 U. S. 242, 68 L. Ed. 1001,
44 S. Ct. 490; Helvering v. Tex-Penn. Oil Co. (1937),
300 U. S. 481, 81 L. Ed. 755, 57 S. Ct. 569; Watson v.
Commissioner, 9 Cir. (1932) 62 F.(2d) 35.
The decisions upon which petitioner relies and
which petitioner contends decide the real issue in-
volved in this case, establish that a transaction may
involve a sale of the good will of a business even
though the good will was not mentioned or specifically
considered in the negotiations between the parties and
the transaction was in form a mere sale of tangible
assets. White & Wells v. Commissioner, 19 B.T.A.
416, Affm'd., 2 Cir. 50 F.(2d) 120; Pfleghar Hard-
ware Specialty Co. v. Blair, 2 Cir. (1929), 30 F.(2d)
614; Betts v. United States, 62 Ct. Cls. 1; Didlake v.
Roden Grocery Co., 160 Ala. 484, 49 So. 384.
C. The testimony of Mr. Grace is entitled to full consideration
and weight and the Tax Court erred in disregarding his
testimony.
Respondent challenges the testimony of Mr. Grace
as being inconsistent with and contrary to the docu-
mentary evidence and suggests that little or no weight
should be given to his testimony. Respondent's con-
tentions in this regard are not well founded and are
not justified by the facts and circumstances.
While it is true that Mr. Grace is an interested
party, that is generally true in a tax case and cer-
tainly does not disqualify a witness. It should also
be noted that Mr. Grace is a man of high standing
in the community and has held high office in many
business and civil organizations. (R. 20, 47-48.) Re-
spondent's Exhibit M (R. 135) shows that Mr. Grace
had made a full statement of the transaction to Gov-
ernment representatives before the trial of this case
and that Mr. McFarland, the attorney who repre-
sented respondent at the trial had reviewed the state-
ment with Mr. Weller, the representative of Garrett &
Company. Mr. McFarland 's conference with Mr. Wel-
ler apparently disclosed no important discrepancies in
Mr. Grace's statement of the transaction for on cross-
examination Mr. McFarland did not call attention
to any discrepancies between Mr. Grace's testimony
and his previous statement. These facts speak well
for the accuracy and consistency of the testimony of
Mr. Grace.
Despite the fact that the matter was not mentioned
on cross-examination respondent now relies on his
Exhibit M (R. 135) in his effort to discredit the testi-
mony of Mr. Grace. (Respondent's Brief, p. 16.)
Respondent refers to Mr. Weller's statement that he
did not recall that petitioner wanted to sell its plant to
Garrett & Company and contends that that statement
presents a material contradiction which would justify
disregarding other portions of the testimony of Mr.
Grace. Respondent omits to mention the preceding
sentence in Mr. Weller's statement which reads as
follows :
''They (Mr. McFarland and Mr. Tonjes) read me
Mr. Grace's statement of the transaction which was
all right with two exceptions and one was that Mr.
Grace claims that when we were dickering he wanted
to sell us the winery and made a price of $125,000 on
it but that we insisted that we would prefer a lease."
(Italics supplied.) The other exception was that Mr.
Weller put petitioner in touch with Taylor Company
which purchased the plant in 1944.
Mr. Weller's voluntary statement that Mr. Grace's
statement of the transaction, which presumably was
the same as his testimony, ''was all right" except for
the two relatively unimportant exceptions mentioned,
would seem to corrobortae the testimony of Mr, Grace
with regard to the principal elements of the transac-
tion rather than contradict it as respondent contends.
Respondent stresses the fact that the testimony of
Mr. Grace that he would not sell anything unless he
sold the entire business including the good will is in-
consistent with the documentary evidence in which
there is no mention of the good will. Mr. Grace ex-
plained that Mr. Weller suggested that he could give
him the price asked by paying fifty cents a gallon
for the wine. (R. 56.) Since the price was to be
computed on the basis of the wine, there was no reason
for making further mention of the good will. Re-
spondent states that Mr. Grace could not explain how
the good will value was computed in the prices set
forth in his telegraphic communcation to Garrett &
Company in which he suggested varying prices for
different wines. On redirect examination Mr. Grace
explained that the prices quoted would have given
petitioner a little more for its good will than he had
asked originally and eventually received and that he
thought Garrett & Company might pay the higher
price because of the interest they had shown in the
previous meetings. (R. 83.) In other words Mr. Grace
was merely trying to secure a higher price than that
at which he had offered to sell originally.
Respondent asserts that Mr. Grace exaggerted the
value and importance of the winery personnel organi-
zation and to support this assertion respondent calls
attention to Ex. 4-D (R. 121) from which respondent
concludes that only $10,700 was paid by petitioner in
1942 for all wages, salaries and commissions. On the
basis of his interpretation of Ex. 4-D respondent
asserts that there was "a deliberate effort to color
the facts". (Respondent's Brief, p. 20.) While the
record does not disclose the salaries which were paid
to petitioner's key men and other regular employees,
it appeal's, quite obviously, from an examination of
Ex. 4-D that salaries and other compensation paid in
connection with the manufacture of wine were in-
cluded as part of the Inventory Cost which was $69,-
115.82 for the year 1942. There is no basis whatso-
ever in Ex. 4-D for respondent's conclusions or his
accusations.
It is respectfully submitted that respondent's at-
tempts to discredit the testimony of Mr. Grace are
based entirely upon misinterpretations and distortions
of the evidence. It is further respectfully submitted
that the testimony of Mr. Grace is reasonable and
logical and when considered in the light of his ex-
planations is not inconsistent with the docimientary
evidence. Mr. Grace furnished respondent with a
statement of the transaction before the trial, which
was presumably the same as his testimony and that
statement when investigated by respondent's attor-
neys was found to be correct in most material respects
by Mr. Weller who represented Garrett & Company
in the transaction. The testimony of Mr. Grace was
uncontradicted, was in effect corroborated by Mr.
Weller 's letter (Ex. M, R. 135) and was entitled to
full weight and consideration by the Tax Court.
D. In substance and efifect the transaction was a sale of peti-
tioner's entire winery business including its good will.
Both the Tax Court and respondent appear to have
misimderstood or misinterpreted petitioner's conten-
tions. Petitioner has never contended that it and
Garrett & Company entered into an agreement for
the sale and purchase of petitioner's good will as such.
8
Petitioner's contention is that the transaction was in
substance and effect a transfer of petitioner's entire
winery business and all the assets thereof and since
the good will of a business is inseparable from the
business, the good will was also transferred even
though it was not specifically mentioned in the tele-
graphic negotiations or the final agreement and even
though the purchaser may have had no particular
desire for or interest in the good will.
Petitioner owned and operated a successful winery
business which had good will of considerable value.
Petitioner wanted to dispose of the business but was
unwilling to do so except for a price which would be
sufficient to compensate it for the tangible assets,
which consisted primarily of its wine inventory, and
the good will of the business. Petitioner so advised
the prospective purchaser and was offered a price for
its wine which equalled the total price it would have
received for the wine if it had been sold in the regular
course of its business plus the price it was asking
for its good will.
In the transaction petitioner transferred, by sale
and lease, all of the assets of its winery business.
Petitioner's entire wine inventory, its plant and equip-
ment, its labels, its list of customers, its staff of ex-
perienced employees and its permit to manufacture
and sell wine all went over to Garrett & Company.
Petitioner retained nothing except the reversionary
interest in the plant and equipment which had been
leased to Garrett & Company for five years with the
right of renewal. The good will of the business was
inseparably attached to the assets which passed to
Garrett & Company. Petitioner retained nothing to
which the good will could attach. Good will cannot be
separated from the business which creates it and it
certainly did not remain with the reversionary interest
in the plant and equipment.
In White S Wells Co. v. Commissioner, 19 B.T.A.
426, Affm'd. 2 Cir., 50 F.(2d) 120 and Pfleghar Hard-
ware Specialty Co. v. Blair, 2 Cir., 30 F.(2d) 614, dis-
cussed in detail in petitioner's opening brief (pp. 22 to
26), on the basis of facts which were identical in all
material respects the Circuit Court for the Second Cir-
cuit held that there was a sale of good will. Good will
was not mentioned in the sales contracts in either of the
cited cases. Likewise the facts establish that the pur-
chasers had no need or desire for the good will of the
sellers. In those cases, as here, the Commissioner con-
tended that there had been no sale of good will. The
Court held, however, that the good will passed with
the other assets of thie business and that part of the
consideration received was for the good will.
The fact that the purchaser may not have wanted
and may never have used the good will is not material.
We are here concerned with the seller and its tax
liability should be determined on the basis of the con-
sideration it received for the assets it transferred.
See Ida P. Hiiggiyis, 1 T. C. 12 
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